Summary - Every week, investors receive economic reports that provide snapshots on the state of the economy in our country and of the world economy. Each monthly economic report, which is also known as an economic indicator, measures a particular part of the economy. As standalone reports, they tell a limited story but put together, they give analysts and investors the data they need to assign an educated guess about the direction of individual securities or the broader market.
The economic reports are divided into three categories: lagging indicators, leading indicators, and coincident indicators. Leading indicators generally begin to occur before the economy reflects that change. This means they are a signal to investors about what may happen in the future. Existing home sales and housing starts are two of the more common leading indicators. Lagging indicators are those changes that are reported after the economy has absorbed them. Consumer behavior is frequently considered a lagging indicator. Finally, coincident indicators are indicators that are being measured at roughly the same time they are being reflected in the economy. The direction of interest rates is considered a coincident indicator because the economy will start to change immediately after a rate change is announced.
Investors have a responsibility to educate ourselves on how the economy affects our investments. Fortunately, we live in a time where access to data has never been easier. In fact, the problem many investors face today is information overload that can lead to analysis paralysis. We have this data point that contradicts another data point, but they both make sense. Can both be true? Frequently, the answer is yes. Our economy is a living entity in that at any given moment there are many moving parts some that are working together and some that are working in opposition.
One way for investors to get information that provides relevant data that can help investors understand national and global economic trends is through economic reports. These reports, which are provided on a consistent schedule, are staggered throughout the month. In this way, investors only have to digest a little data at a time. At the same time, investors may have to use pieces of different economic reports in tandem to make accurate forecasts about market trends.
In this article, we'll break down what economic reports are and what are the most common categories of economic reports. We'll also provide a list of the agencies that are most responsible for producing the report. We'll break down the difference between a leading indicator, a lagging indicator, and coincident indicator and we'll conclude by reviewing how investors can use these reports to ensure they are getting the most from them.
What are economic reports?
Economic reports contain data about various sectors of the U.S. and global economy. These reports are published on a set schedule by different departments of the Federal Government. For example, the monthly jobs creation report and unemployment rate are published on the first Friday of every month. The general categories of economic reports are:
- Business activity– this category provides data regarding wholesale inventories, industrial production, regional manufacturing surveys (also called the “Business Outlook Survey”) and construction spending
- Business inventories– this category provides data related to business inventories
- International– this category provides data regarding international trade including our trade balance and export prices as well as international capital flows
- Sales– this category reports automobile and truck sales along with retail sales
- Orders– this category tracks data related to durable goods orders and factory orders
- Real Estate– this category reports data on housing starts and building permits as well as new home sales
- Production– this category measures Gross Domestic Product (GDP) – including real GDP. Reports in this category will also provide data on productivity and costs
- Consumer– this is one of the more closely watched categories that reports on the use of consumer credit, the employment cost index and data regarding personal income and consumption
- Employment– this is another closely watched category that includes the employment report which reports hourly earnings and nonfarm payrolls. Other indicators in this category track movement in the labor force including initial jobless claims and job openings
- Price Increase (Inflation)– this category delivers two of the most commonly referenced economic indicators the Consumer Price Index (CPI) and the Producer Price Index (PPI)
- Government– this category is essentially a report on the U.S. Treasury Budget (i.e. our nation’s balance sheet)
- Monetary– this category gives a report on the nation’s money supply using M2 – a measure commonly used by central banks. This report is closely related to our nation’s monetary policy.
Who issues economic reports?
There are many U.S. government agencies that issue economic reports. The most common reports come from the following agencies:
- S. Census Bureau
- S. Treasury Department
- Federal Reserve
- Philadelphia Fed Index
- S. Bureau of Economic Analysis
- S. Department of Commerce
- S. Bureau of Labor Statistics
- Federal Reserve Board
What are leading, lagging and coincident indicators?
As we mentioned above, economic indicators are snapshots that highlight different aspects of economic activity. However, it would be virtually impossible to capture all the data needed in real time. For that reason, indicators are classified as either leading indicators (i.e. indicators of what may happen); lagging indicators (indicators of what has happened) or coincident indicators (indicators of what is happening now). Here are more details about each category.
- Leading indicators- A phrase you’ll hear frequently in the media are reports on leading economic indicators. A leading indicator means a data point or a trend that begins to happen before it is detected in the overall economy. In this way, leading indicators are said to signal what may happen in the future. These indicators include but are not limited to retail sales, housing starts, and new home sales. The stock market, while not an economic report, is also considered a key leading indicator. An increase or decline in these forward-looking areas may trigger a subsequent increase or decrease in other areas of the economy.
- Lagging Indicators- The opposite of leading indicators are lagging indicators. These indicators provide data that point out what is already being reflected in the economy. In other words, they are telling investors what has already happened. Lagging indicators include some of the most closely watched indicators such as unemployment (for people to be counted in the survey they have to already be unemployed), Gross domestic product (which tells you how strong the economy was at a certain period of time). The Consumer Price Index (CPI) which provides a broad measurement of inflation is also considered to be a lagging indicator as are business inventories. In these cases, analysts look to assess the strength of a trend.
- Coincident indicators -As the name suggests, coincident indicators are occurring at approximately the same time as the changes they are signaling. Personal income would fall into this category because these should rise as an indication of a strong economy. Conversely, investors would expect personal income to decline in an economy that is weakening. Interest rates are another closely watched economic report that is considered a coincident indicator.
What economic reports are most valuable to investors?
One of the most important tasks for an investor is to be able to quickly focus on the economic reports that are most important to their portfolio. Gross Domestic Product (GDP) is considered to be one of the most valuable reports because it provides an overall scorecard of how the country is doing economically. GDP measures the market value of all the goods and services produced in the economy over a given period of time. It is reported quarterly and is presented on an annualized percent basis. As an investor, it is important to understand the context behind the GDP number. GDP growth is typically a byproduct of an expanding economy. However, a declining GDP may not necessarily be signaling a recession; it may simply be showing that the rate of growth is slowing.
That brings up an additional point when considering the value of these reports. Some of these are very industry focused (such as retail and housing). For example, if you are invested in financial services stocks, you’ll want to pay attention to the direction of interest rates as those will be among the stock most affected by interest rate changes. But you’ll also want to pay attention to housing data because that will affect the mortgage market. If you are investing in a commodity such as crude oil, you will want to pay particular attention to crude oil prices and oil and gas production numbers. If you’re invested in countries that do business internationally, you’ll want to track exports to see how well their products will be selling overseas. Every investor has to consider the data provided by an economic report based on the risk to their portfolio.
How accurate are economic reports?
Like any statistical measurement, every economic indicator has strengths and weaknesses. Some have large sample sizes; some have much smaller (or narrow geographic) samples. Some indicators, such as retail sales, can be extremely sensitive to seasonal adjustments. Therefore, investors should look at a variety of indicators before forming overall conclusions about the state of the economy, and particular about how it may affect any individual stock or a category of securities.
By taking the time to understand the strengths and limitations of different reports, it’s possible for investors to use various reports in tandem to help identify trends. For example, is a sudden decline in retail sales supported by lower personal expenditures, or are other factors weighing on the number? Brick-and-mortar stores can be affected by weather patterns that can skew the data (i.e. consumers may not be spending at all because they’re not leaving their home). If a report shows increased new factory orders, are there concurrent increases in factory shipments or in durable goods?
Also, because economic reports only provide a snapshot of the economy, they are best used in comparison to economic reports from previous months or even a year-over-year view. This can help smooth out seasonal differences or other anomalies that can affect the data.
The final word on economic reports
Investors need to pay close attention to economic indicators. These free, and publicly available, reports provide valuable data on the state of the economy that would be virtually impossible for an individual investor to compile on their own. Because they are released on a consistent schedule, investors are assured of receiving the information at the same time as other investors. In a 24-hour news cycle, many analysts will try to provide an early analysis of what the reports will say. Rather than focus on a given number, investors should pay attention to this commentary to gain a better understanding of what the numbers mean. Economic reports, while very concise, are generally just a compilation of raw data. Any decisions regarding a change in asset allocation or investment strategy requires a deeper context of what trends the reports may be revealing.