Key economic indicators are a set of factors that provide current information and foresee changes in the future of the economy. This compares to lagging indicators such as job growth or GDP. Key indicators can help economists predict ahead of changes in the US economy. Leading indicators are not always accurate predictors of future economic activity, but they can work together with other indicators to provide data about the future expansion or contraction of the economy.
What are the components of leading economic index
An index of key economic indicators is constructed to summarize future economic performance. The goal is to reveal inflection points in economic data.
The ten components of the Conference Board’s leading economic index include:
Average Weekly Hours, Manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
Ism index of new orders
Manufacturers’ new orders, use of capital goods except aircraft orders
Building Permit, New Private Housing Units
Stock prices, 500 common stock
Leading credit index
Interest rate spreads, 10-year Treasury bonds less federal money
Average Consumer Expectations for Business Conditions
What does each component tell you?
Several components of the major economic index describe employment. Average weekly hours in manufacturing, as well as weekly unemployment claims, are components of employment. Although both of these components are helpful, job data is usually a lagging indicator. When companies start hiring or retrenching people, as the business is either running at a fast pace or decreasing rapidly. Rarely do companies reveal that expansion or contraction is needed before they can affect their business.
The second group of components that are associated with major economic indices are related orders. These data points are very helpful in predicting future economic activity. The three order components are the manufacturer’s new orders of consumer goods and materials. ISM index or new orders and new orders of the manufacturer of non-capital goods except aircraft orders. This last component is a proxy for commercial capital investment.
The Housing Building Permit is the next component and provides the index with information about future housing starts. Before building a house, a builder needs to secure a building permit that will give him the proper license to build in that area.
The next component is stock prices. The major economic index uses to determine market sentiment. The leading index uses a leading credit index to determine whether people are attempting to increase or decrease their lending, which provides the index with information about future spending.
The next component of the index is the yield curve. The index calculated the difference between the 10-year US Treasury yield and the federal funds rate set by the US Federal Reserve. The yield curve tells the index whether the cost of borrowing increases or decreases over time. In general, a borrower will pay higher interest rates for longer term loans. This is because uncertainty persists for a long time. If you want to trade debt or currencies, the yield curve is very important.
If short-term yields are higher than long-term yields, such as the wealth rate fed at a higher level than the yield of the 10-year treasury, the yield curve is inverted. An inverse yield curve means that the investor believes that there is more risk in the short term than in the long term. This type of scenario usually indicates a slowdown. The final component is the average consumer expectations for business conditions. It is a measure of sentiment and can be very helpful in determining short-term movements in economic activity.
How do you trade around the leading economic index
The major economic index has 10 sub-commers that can be viewed before release. Similar to other economic releases, this index will provide opportunities when it goes above or below expectations. Since most sub-editors can already be calculated by analysts, no surprises should be taken lightly. Both better than expected or worse than expected numbers should tell you that the market may be positioned incorrectly, which can cause a move in many underlying securities.