Understanding Economic Indicators and Their Crucial Role in Consultancy

Kevin Woods
Posted by Kevin Woods on Jul 17, 2023 2:20:53 PM

Economic indicators are vital navigation tools in the dynamic world of economic conditions, providing critical guidance for businesses, investors, policymakers, and consultants. They paint a comprehensive picture of the economy's health, allowing for data-driven decisions that can make or break success. This article delves into the intricacies of leading, coincident, and lagging indicators and how consultants employ these for strategic client advice. 

Leading Economic Indicators: Foreseeing the Future 

Leading indicators are the harbingers of economic change. These metrics shift before the economy adjusts in a particular direction, thus signaling potential future trends. 

Prominent leading indicators include: 

  • Stock Market Performance: The stock market often acts as a barometer of investor sentiment, with rising indexes pointing towards investor confidence and potential economic expansion. 
  • Building Permits: An increase in issued permits signals anticipated growth in construction activity, an early indication of economic vitality. 
  • Manufacturers' New Orders: A rise in new orders suggests manufacturers anticipate increased consumer demand, a positive sign for economic growth. 
  • Average Weekly Initial Claims for Unemployment Insurance: A surge in claims could portend an economic slowdown, as it suggests job losses. 
  • Average Weekly Manufacturing Hours: Longer workweeks can indicate an upcoming rise in manufacturing activity, signaling economic strength. 
  • Interest Rate Spread: A wider gap between short and long-term interest rates can suggest economic expansion, as investors anticipate higher returns from long-term investments. 
  • Consumer Confidence Index: High consumer confidence can suggest increased future spending, fueling economic growth. 
  • Leading Credit Index: This index consists of six financial market instruments that tend to lead cyclical turning points, providing a snapshot of future economic performance. 

Reliable sources for these indicators include the Federal Reserve, the U.S. Census Bureau, and the U.S. Bureau of Economic Analysis. 

Lagging Economic Indicators: Confirming the Course 

Lagging indicators offer retrospective insights, changing after the economy has embarked on a particular path. These indicators are crucial in confirming or refuting the forecasts made by leading indicators. 

Key lagging indicators include: 

  • Unemployment Rate: A rise in unemployment typically occurs after an economic downturn, reinforcing the existence of an economic contraction. 
  • Inventories to Sales Ratio: A high ratio can suggest an economic slowdown due to decreased demand, confirming a trend of slower growth. 
  • Commercial Lending Activity: An increase in lending often follows an economic upturn, confirming the economic expansion. 
  • Corporate Profits: An increase in profits usually comes after an overall improvement in economic activity. 
  • Average Duration of Unemployment: Extended periods of unemployment usually follow economic downturns, providing further evidence of economic contraction. 
  • Changes in Consumer Price Index for Services: This can reflect inflation or deflation trends, providing insight into economic health. 
  • Total Business Loans: An increase in business loans usually comes after an economic expansion, confirming improved business conditions. 

Consultants often turn to the U.S. Bureau of Labor Statistics and the Federal Reserve for reliable data on these indicators. 

Coincident Economic Indicators: Evaluating the Present 

Coincident indicators offer a snapshot of the present, changing concurrently with the economy. These indicators help to confirm the current state of the economic cycle. 

Key coincident indicators include: 

  • GDP: The GDP is the most comprehensive measure of a country's overall economic activity, serving as an economic report card. 
  • Personal Income: The state of individual earnings can reflect the economy's current health. 
  • Retail Sales: Retail sales indicate consumer spending and confidence, offering insights into current economic conditions. 
  • Industrial Production and Manufacturing Trade Sales: These measures reflect the current level of industrial activity, a key driver of economic health. 
  • Non-agricultural Employment: This can offer a real-time reflection of the state of the job market. 
  • Personal Consumption Expenditures: This reflects the current consumer spending patterns, a vital component of economic health. 

Reliable sources for these indicators include the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. 

Economic Indicators: Consultants' Toolbox for Client Strategy 

For consultants, economic indicators offer a three-pronged approach to understanding and predicting economic trends. By using leading indicators, consultants can anticipate future market conditions, providing strategic foresight for their clients. Lagging indicators allow them to verify or adjust these forecasts, ensuring their advice stays relevant and accurate. And coincident indicators provide a real-time check on current economic conditions, helping clients understand the immediate economic context for their decision-making. 

However, while economic indicators are potent tools, consultants know they don't operate in a vacuum. To provide a comprehensive, holistic analysis, they should use them with other data types, including industry-specific indicators, company financials, and geopolitical developments. By doing so, consultants can ensure they provide their clients with the most informed, strategic advice, helping them successfully navigate economic ups and downs. 

Understanding economic indicators is more important than ever in a world increasingly driven by data. These metrics offer invaluable insights into the economy's past, present, and potential future, guiding decision-making at all levels of business. And with expert consultants to interpret these indicators, companies can make more strategic decisions, capitalizing on opportunities and navigating risks ensuring their continued success in a dynamic economic landscape. 

Topics: Management Advisory


Sign up and stay plugged into the education, news pieces and information relevant to you.

Subscribe to The Woodard Report today! 

Do you have questions about this article? Email us and let us know > info@woodard.com