What are economic indicators?

In times of heightened turbulence in the global economy, talk of economic indicators and their impact on the financial markets comes to the fore.

The term “economic indicators” incorporates a wide range of data that measure a country’s economic activity. These indicators can have a bearing on share prices as they highlight the overall economic environment that companies are operating in. They also drive the direction of foreign currency exchange rates in the forex market. Economic indicators examples include:

There are many other data points such as bank lending rates, business confidence and labour productivity that also serve as useful indicators of the performance of national economies and the health of the global economy.

Where have you heard about economic indicators?

As an investor, you have likely read analysis that gives economic indicators meaning in the context of the equities and forex markets. Statistics such as unemployment and consumer spending can indicate whether a company’s customers have disposable income available to buy its products or services. Trade balance data show whether there is export demand for products from other countries, which can be crucial for companies that conduct a large volume of business internationally.

These factors can, in turn, have an influence on stock market sentiment, forex rates and the performance of individual company stocks, so it is important to monitor macroeconomic conditions.

Now that we have economic indicators explained, let’s look at why they matter to market participants in more detail.

What do you need to know about economic indicators?

What do economic indicators mean for investors? Some economic indicators are leading, so they change before an economic shift and can be used to forecast economic activity; while others are lagging indicators that confirm what has already happened in an economy over a period of time.

Leading indicators include bond yields, which can forecast recessions; inventories, which point to demand levels; and the housing market, which indicates wealth, construction jobs and government property tax income. Lagging indicators include GDP, which is reported after a specified period has ended; interest rates, which are adjusted in response to market conditions; and inflation, which reflects adjustments in the cost of living.

Understanding whether economic indicators are leading or lagging and what they show about the state of the economy is valuable for investors when making decisions about what assets to invest in and when. For example, if indicators suggest an economy is heading towards a recession, investors may want to reduce their holdings in cyclical stocks and increase their investment in consumer staples companies that make products consumers will continue to buy regardless of the state of the economy. If inflation is rising, investors may increase their holdings of precious metals as a hedge against the falling value of the US dollar.

The statistics that form economic indicators are typically released by governments and it is in their interest to present the figures in the best possible light, so it is valuable for investors to be able to interpret the data for themselves and seek out impartial sources of analysis.