Late to the party? Try Lagging Indicators

Well what are indicators?

Indicators from an Economic standpoint are pieces of data used to judge the overall health of an economy. Leading indicators include the stock market, manufacturing activity, inventory levels, retail sales, new building permits, strength of the housing market, and level of new business startups. One could say these are easily identifiable areas to focus on when wanting a current snapshot of the overall economy.

Lagging indicators are the not so apparent factors that shift after the economy changes and are often helpful in identifying long-term trends. These include changes in gross domestic product (GDP), Income and Wages, Unemployment Rate, Consumer Price Index, Currency Strength, Interest Rates, Corporate Profits, Balance of Trade, and the value of commodity substitutes to U.S. Dollar.

Gross Domestic Product

GDP which represents the total value of goods and services provided in a country over a period in time is one of the most important metrics to measure the economy’s current health. An increase in GDP is a signal of a strong economy. However, when GDP drops for more than two quarters, we are entering a recession.

Income and Wages

In a strong economic environment earnings will be increasing regularly to keep up with the average cost of living. Conversely, if incomes are declining it is a sign that employers are laying workers off, reducing employee hours, or cutting back salaries.

Unemployment Rate

In a healthy economy, unemployment rates will be anywhere from 3% to 5%. As unemployment rises beyond those levels and consumers have less money to spend, retail stores, GDP, housing markets, and stocks are all negatively impacted. Government debt may also increase due to stimulus spending and assistance programs.

Consumer Price Index

The consumer price index (CPI) represents the ever increasing cost of living better known as inflation. CPI measure the cost of essential goods and services which include: vehicles, medical care, professional services, shelter, clothing, transportation, and electronics. Inflation is derived by taking the average increased cost of essential goods and services over a period of time.

Higher inflation may diminish the value of the dollar quicker than the average consumer’s income rises. This leads to a decrease in purchasing power and a subsequent decline in the average standard of living. High Inflation can negatively affect job growth, employment rate, and GDP.

Currency Strength

A strong currency increases a country’s buying and selling power with other nations meaning that a country can import goods at lower costs and sell products at higher prices to international buyers.

A weaker dollar has its advantages in the sense that the United States can attract more tourist and lead to an increased demand for American products as they are perceived to be cheaper.

Interest Rates

Interest rates represent the cost of borrowing money. During weaker economic times interest rates are likely to be lower to encourage businesses to borrow money and increase economic output

Corporate Profits

Strong corporate profits typically represent a rise in GDP because they reflect an increase in good and services produced which also encourages job growth. This may also lead to better performing stock market as individuals look for places to invest income.

Balance of Trade

Balance of trade is the net difference between the value of exports to imports and indicates there is a trade surplus meaning more money is coming into the country or a trade deficit meaning more money is leaving the country.

Value of Commodity Substitutes to U.S. Dollar

Gold and Silver are commonly viewed as substitutes for the U.S. dollar. When the economy is contracting or there’s a decrease in the dollar value, silver and gold increase in price as they are often viewed as safe haven assets.

Where there are lagging indicators, there are leading indicators. Learn more here!

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