What is a “Leading Indicator”?
A Leading Indicator is a measurement or statistic that can help to signal future events or activities. They can help to predict a pattern or trend, which can be valuable in planning and investing.
In the world of economics, a leading indicator is used to interpret market movements to provide current or future investment opportunities. They appear as statistical data that give clues as to the health of the economy, which can lead investors as to the direction of a particular market.
Some economic leading indicators are:
- Orders for Durable Goods: When consumers are increasing their purchases of heavy items like refrigerators, washing machines and furniture that will last for more than 3 years, it is a positive sign for the economy and shows confidence by consumers.
- Orders for Plant and Equipment: This is a measure of whether an industry is gearing up or down for increases or decreases in production.
- Manufacturing Activity: If rising, it can anticipate an increase in sales. Good to keep an eye on inventories, so production does not get ahead of sales.
- Retail Sales: If retail sales are strong, there can be a positive ripple effect across many areas. The higher the sales, the higher gross domestic product (GDP) growth, leading to better employment numbers and a stronger currency. One possible negative is that if people are overcharging on their credit for their purchases, it can lead to decreasing sales.
- Housing: If increasing, it will lead to more orders for durable goods and consumer spending. If declining and supply exceeds demand, it can lead to a decline in homeowner wealth, increased foreclosures, less new construction and higher unemployment.
Leading indicators can show when the economy is strengthening and is in the early stages of the business cycle, showing potential for growth. They can also show the beginning of a deterioration in the economy, indicating a pullback. Just remember, leading indicators can be a helpful tool in planning your investments, but caution must be taken when using them to make investment decisions.
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