When trading the markets, whether it be Forex, Shares, Indices or any other financial instrument, it is important to develop a thorough understanding of the economy, including how it works and what affects it. Following major economic indicators is a good way to educate yourself and help formulate an idea of where the economy may be heading, so as to adjust your trading activity accordingly. As an example, healthy macroeconomic indicators can be perceived as a signal of economic growth, which is in turn a sign for traders to take a bullish outlook on the markets. An economic indicator usually falls into one of three categories:
- Leading Indicators
- Lagging Indicators
- Coincident Indicators
Leading economic indicators can forecast the future movements of a country’s economy, meaning that changes in these indicators usually precede changes in the economy itself. This makes leading indicators important for governments, who can use them to identify potential negative economic events, such as an impending recession, and act accordingly by implementing policies, such as lowering interest rates, to combat them. Additionally, they are important to traders, who can use them to inform their trading strategies. Some examples of leading economic indicators include:
- Building Permits
- Consumer Confidence Index (CCI)
- Initial Jobless Claims
Lagging indicators usually change after a country’s overall economy does. Unlike leading economic indicators, they do not indicate where the economy is heading, but rather, reflect changes in an economy over time. This means that traders can use these indicators to confirm the strength of long-term market trends, as the economy has already begun moving in a certain direction, and open positions accordingly. Some examples of lagging indicators include:
- Unemployment Rate
- Consumer Price Index (CPI)
- Trade Balance
Coincident indicators usually experience changes at roughly the same time as the overall economy. As such, they offer important insight into the current economic state of a given country. Coincident indicators can provide traders with an understanding of any current market trends, enabling them to take the appropriate position. Some examples of Coincident indicators include:
- Personal Income
- Retail Sales
- Gross Domestic Product (GDP)
Leading Economic Indicators
As we have seen, there are many types of economic indicators, all providing insightful and actionable data about the overall economy, which is of great importance both to governments and traders. Below you can find a list of the leading economic indicators, and a comprehensive description of each. This will help you understand how to use them to measure economic growth, understand market trends, and make more calculated trading decisions.
Bank of England Asset Purchase Facility (Quantitative Easing)
The Asset Purchase Facility (APF), also known as Quantitative Easing, is a measure taken by the Bank of England (BoE) in an effort to influence long-term interest rates and boost the overall economy. This is achieved by injecting money into the economy through the purchasing of bonds on the open market.
Why it is important: The Asset Purchase Facility can have significant effects on the British pound. Traders speculating on currency pairs including the GBP can use this as a leading indicator, as Quantitative Easing will likely have a positive effect on British economic growth. By following this indicator, traders can predict when the price of the British pound may increase, and open an appropriate market position to take advantage of this.
When the data is released: This report is released quarterly by the Bank of England, and can be found on their website.
The Building Permit Report includes data regarding the total number of monthly building permits that have been granted by the U.S. government.
Why it is important: It is important for traders to follow the Building Permit Report closely, as it can provide major hints on the future state of the economy. This makes the report a significant leading indicator for traders, especially those speculating on currency pairs including the USD.
When the data is released: This report is released between the 17th and 18th of every month by the U.S. Census Bureau, and can be found on their website.
Consumer Confidence Index (CCI)
The Consumer Confidence Index (CCI) is a measure of how optimistic the public is about the current and future economic state of a country. The data for this report is gathered from a survey sent to consumers, containing questions relating to their future buying intentions.
Why it is important: The CCI is an important leading indicator for traders to follow, as strong consumer confidence, which means people feel their standard of living is increasing, may lead to higher spending. When consumers spend more, the amount of money being injected into a national economy increases, leading to economic growth.
When the data is released: The U.S. CCI report is released by The Conference Board on the final Tuesday of every month, and can be found on their website.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures changes in the cost of living, and is one of the most often used indicators to identify inflation. The CPI is compiled by assessing the changes in price of a range of consumer goods including food and beverages, housing, transportation and medical care. The report is used by the government to determine any fiscal policies that may be required to combat either inflation or deflation.
Why it is important: The CPI report is an important lagging indicator for traders to follow. Since it can be used to identify periods of inflation and deflation, investors can use the indicator to anticipate potential interest rate changes by the Central Banks, and plan their trading accordingly.
When the data is released: The U.S. CPI report is released by the Bureau of Labor Statistics on a monthly basis, and can be found on their website.
Durable Goods Orders
The Durable Goods Order measures new orders placed with domestic manufacturers for the production and delivery of durable, or hard goods, such as vehicles and heavy machinery.
Why it is important: The Durable Goods Order report is a useful leading indicator for traders as it is linked to economic growth. The amount of orders placed can provide insights into how busy the factories may be in future, which affects both sales figures and employee working hours.
When the data is released: The Durable Goods Order report is released by the U.S. Census Bureau around the 20th of every month, and can be found on their website.
Employment Cost Index (ECI)
The Employment Cost Index (ECI) measures changes in labour costs for businesses including wages, bonuses and benefits, for all non-farm industries, excluding government employees. The data for the report is collected from a survey of employer payrolls.
Why it is important: The ECI report is an important lagging indicator for investors as it is linked to inflation. Employee compensation is one of the major expenses experienced by companies in the production of goods, or provision of services. Any increase usually filters down the supply chain to be shouldered by the end consumer in the form of elevated prices. The Federal Reserve, the U.S. Central Bank, also follows the ECI closely and relies on it heavily for economic policy making.
When the data is released: The ECI report is released quarterly by the Bureau of Labor Statistics, and can be found on their website.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a report that measures the total value of all domestically produced goods and services over a specific period of time. GDP is often used as an indicator of economic health and standard of living in a given country. GDP is one of the most followed key indicators by economists, analysts and traders worldwide, as its release can cause major fluctuations in numerous financial instruments.
Why it is important: As the calculation of GDP is uniform between countries, it is a good way to compare the economic growth between nations. The report can also be used to measure the growth of a country’s economy over time, when compared with previous GDP releases. This means that traders can use it to identify economic trends, and possibly predict how an economy will move in the near future.
When the data is released: In the U.S., the GDP report is released quarterly by the Bureau of Economic Analysis, and can be found on their website.
The Housing Starts report measures the number of new residential construction projects that have begun in a country, in a given month. The report acts as an indicator for the strength of a country’s housing market, and data is collected through a survey distributed to homebuilders nationwide.
Why it is important: As a leading indicator, the Housing Starts report is of importance to traders as it is linked to economic growth. Continuous declines in the number of construction projects may indicate an impending recession, whereas increases in activity may point towards economic growth.
When the data is released: The U.S. Housing Starts report is released around the 17th of each month by the U.S. Census Bureau, in conjunction with the U.S. Department of Housing and Urban Development (HUD), and can be found on their website.
The Industrial Production report measures a country’s monthly output of goods from industrial firms including factories, mines and electric utilities. The data for the report is usually provided by the Bureau of Labor Statistics and various trade associations.
Why it is important: The Industrial Production report is considered a coincident indicator, meaning that any changes it records will often be reflected in the current economy. The report also indicates which industries are experiencing growth, which can be compared with previous releases to discern underlying market trends. The Federal Reserve also follows this report closely for any signs of inflation.
When the data is released: The U.S. Industrial Production report is released monthly by the Federal Reserve Board, and can be found on their website.
Initial Jobless Claims
The Initial Jobless Claims report measures the number of people who have filed claims to receive unemployment insurance benefits, for the first time, nationwide. The report provides an indication of the current strength of the labour market.
Why it is important: The Initial Jobless Claims report is a leading indicator that investors can use to analyse the health of the U.S. economy. A healthy labour market is often linked to a strong economy, as a higher employment rate leads to increases in consumer spending, and thus higher GDP.
When the data is released: The Initial Jobless Claims report is released on a weekly basis by the U.S. Department of Labor, and can be found on their website.
Interest Rate Decision
Interest rate decisions are made by the Central Banks of each country or region on a regular basis. Interest rates are intrinsically linked to national currencies, and each country’s monetary policy. Central Banks raise interest to curb inflation, and lower rates to stimulate economic growth. Interest rate decisions are followed closely by global economists and traders, as they have the potential to cause significant movements in the financial markets upon their release.
Why it is important: Viewed as lagging indicators, traders can use interest rate decisions to understand how an economy has changed over time, and identify any potential trends. Investors can also use other indicators such as the Consumer Price Index, to predict how a Central Bank will change interest rates, and take the appropriate market position.
When the data is released: Interest rate decisions are released by the eight major Central Banks (the Fed, ECB, BoE, BoJ, SNB, BoC, RBA, RBNZ) frequently, and can be found through their respective websites.
Money Supply measures the amount of money currently available for spending in a country’s economy. A country or region’s Central Bank is able to influence the supply of money to an economy through policies such as setting interest rates.
Why it is important: Money Supply acts as a leading indicator, enabling investors to predict potential inflation. Additionally, by following this indicator, traders can gain insight into what policies a Central Bank may exercise to regulate Money Supply, and how these may affect the market.
When the data is released: In the U.S., the Money Supply report is released every Thursday by the Federal Reserve Board, and can be found on their website.
Non-Farm Payrolls (NFP)
The Non-Farm Payrolls report measures changes in the number of paid employees in U.S. businesses, excluding jobs related to the farming industry. The report also shows which industries are experiencing growth in employment rates. The NFP is a key indicator that can cause significant volatility in the financial markets, and is followed by investors, analysts and economists worldwide.
Why it is important: The NFP report acts as a leading indicator for investors, as higher employment figures can indicate companies expanding, as well as an increase in potential consumer spending, leading to economic growth. As the NFP also reports on working hours and wages, traders can predict potential policy changes by the Fed, as wage inflation can lead to an increase in interest rates.
When the data is released: The NFP report is usually released on the last Friday of each month by the U.S. Bureau of Labor Statistics, and can be found on their website.
The Personal Income report measures the total income received by a country’s citizens from wages, interest, dividends and rent. Income from wages is usually the most dominant of the data sets in the report.
Why it is important: The Personal Income report is a Coincident indicator that investors can follow to assess current consumer demand, and potential changes in spending activity. When personal income rises, people are more likely to spend more, injecting money into the economy, which leads to economic growth.
When the data is released: The U.S. Personal Income report is released monthly by the Bureau of Economic Analysis, and can be found on their website.
Producer Price Index (PPI)
The Producer Price Index measures changes in selling prices received by domestic producers of goods and services, throughout the production chain, over a designated period of time. The report covers all physical goods produced domestically, but excludes imports.
Why it is important: As a leading indicator, the PPI report’s importance to investors is as a signal of potential inflation, and changes in economic policy by Central Banks. PPI is intrinsically linked to CPI, as it is expected that any increase in costs to producers will translate into higher prices for consumers. As prices of goods and services rise, the standard of living for consumers will fall, so the PPI report can be used as an early indicator of this.
When the data is released: The U.S. PPI report is released monthly by the Bureau of Labor Statistics, and can be found on their website.
The Retail Sales report measures changes in the value of products sold in the retail sector including food and beverages, clothing and vehicles. The data for the report is obtained from a survey of a subset of businesses of varying size, and extrapolated to represent the sector nationwide.
Why it is important: The Retail Sales report is a leading indicator that can be used by investors to predict the potential for inflation or recession. A significant increase in retail sales will inject more money into a country’s economy, raising the risk of inflation, and the potential for Central Bank intervention. Alternatively, a slow in retail sales signifies a lack of spending by consumers, and could point to an impending recession.
When the data is released: The U.S. Retail Sales report is on the 13th of every month by the U.S. Census Bureau, and can be found on their website.
The Trade Balance report measures the difference between the value of a country’s imports in comparison to its exports. When the value of exports significantly outweighs that of imports, there is said to be a trade surplus. Alternatively, when the value of imports is significantly higher than that of exports, there is a trade deficit.
Why it is important: The Trade Balance report acts as a lagging indicator for investors, providing insight into how the economic health of a country has changed. In addition, nations that run a significant trade deficit can accumulate large amounts of debt, which in turn may lead to a devaluation of the national currency.
When the data is released: The U.S. Trade Balance report is released around the 19th of every month by the Bureau of Economic Analysis, and can be found on their website.
The Unemployment Rate report provides insights into the number of unemployed individuals in a country, at a specific time. The rate itself is calculated by dividing the number of unemployed people by a nation’s total civilian labour force.
Why it is important: The Unemployment Rate report acts as a lagging indicator that is of significant importance to investors. Unemployed individuals are likely to curtail spending due to lack of income, reducing the amount of money flowing into a country’s economy. This can have a domino effect, leading to the unemployment of further individuals, a decrease in GDP, and an increase in the potential for a recession. Conversely, a low unemployment rate in combination with other healthy macroeconomic indicators can be seen as a sign of economic growth, increased consumer spending, and a signal that investors should take a bullish stand on the markets.
When the data is released: The U.S. Unemployment Rate report is released on the first Thursday of every month by the Bureau of Labor Statistics, an arm of the U.S. Department of Labor, and can be found on their website.
We have covered a wide variety of major economic indicators including key Leading Indicators such as the NFP, which traders can use to predict future economic growth, Lagging Indicators such as the CPI, which can help identify impending inflation, and Coincident Indicators such as the Personal Income report, which investors can use to assess consumer spending. All of the indicators we have listed above are of great importance for investors that want to remain informed about the current and potential future performance of national economies. However, studying them will also help you gain a better understanding of how an economy works and what events can cause significant fluctuations in the financial markets. Economic indicators are a key tool in any investor’s arsenal, and if you want to make the most out of your trading, understanding how to use them is of utmost importance.