We live in a data rich world where much of our life is measured, ranked, and quantified. If you have kids, you know that one of the first things the doctors and nurses do in the hospital after the birth of your child is to measure their weight and length. To provide context to those measurements, health care providers present that weight and length as a percentile. As kids age, the pediatrician at the routine wellness checks will show your child’s growth charted against “typical” growth trajectories. Where your kid falls on this chart is often used to estimate the height of your child as an adult. It was probably around the third wellness check for my oldest daughter before I realized that a pediatrician looks at indicators on early childhood development in a very similar fashion to how an economist tracks indicators critical to the local, regional, or national economy.
At the most basic level, an economic indicator is a measure that tells us something about a market. Economies are big and complex systems. So, there are a multitude of indicators that can range from being highly granular (i.e., new unemployment insurance claims for construction workers in Jackson County) to very broad (i.e., U.S. Gross Domestic Product). These indicators can be broken down into three basic categories: lagging, coincident, and leading. As you will see, these different categories align well with the measures used by pediatricians and teachers to measure the health and development of a child.
Lagging indicators are “old” data that tell us something about where we came from. “Old” is relative, as many lagging indicators reference the previous month or quarter, not ancient history. A child’s report card is a great example of a lagging indicator. The teacher provides these report cards after the end of the term to tell us about a child’s performance the previous 6 months. A report card does not tell us about how they will do next term or even the current proficiency in a particular subject, but it does provide some broad understanding about strengths and areas where the child needs more attention. Lagging indicators may be the least helpful for telling us about a future tomorrow, but they are the bedrock economic indicators used to anchor our understanding of where we have come from.
The key to these lagging measures is that they give us some insight into changes over time. The classic example of lagging indicators in the labor market areemploymentandunemploymentmeasures produced by the U.S. Bureau of Labor Statistics. Another popular lagging indicator produced by the Bureau of Labor Statistics is theConsumer Price Index, the most widely used measure of inflation. These lagging indicators (i.e., employment, home prices, GDP, and CPI) are widely used economic measures critical for our understanding of how the economy has performed in the past. But these indicators do not tell us about today and they do not give us much insight into a future tomorrow.
Coincident indicators, often including what people refer to as “real-time data”, are measures that tell us about what is happening at this moment. They are like taking the temperature of a sick child. It tells you exactly how hot or cold the child is, which can tell you if they have a fever.
One of my favorite coincident indicators for the broader economy isunemployment insurance claims. If someone files an unemployment insurance claim today, they will likely show up as statistically unemployed a month or two from now. However, seeing those claims in near real time can reveal changes to the economy much quicker. There are far fewer coincident indicators than lagging indicators, but as technology increases, we are seeing more of these real-time metrics being used. Another great example is TheConference Board’s Help Wanted Online programthat measures labor demand in near real time by pulling job ads off the internet.
The final broad category of economic indicators are leading indicators. These often measure something that happened in the past or present, but they are correlated with some future event. As a result, they can give us some insight into future trends. This is like using a child’s growth chart to estimate the adult height of a child. Is it a perfect indicator? No. But, you have some general insight into whether your child will likely have a future as an NBA center.
The leading indicator I reference the most is job ads from theU.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Program. A job ad tells us about the demand for labor. Current labor demand leads to future hiring. A perfect indicator? No. Many job ads are canceled or never filled, but these job ads correlate well with future hiring 3-6 months into the future. Another great leading indicator is building permits. Like job ads, building permits show the intent to do something, which in this case is to build a structure. TheU.S. Census Bureau, Building Permits Surveyhas great information on residential building permit activity that provides some insight into future housing inventory and demand for construction workers.
The component of the economy you are most interested in better understanding will determine the indicators you research. But make sure to look at the available lagging, coincident, and leading indicators for that topic. Including these different types of indicators will better inform where we came from, where we are, and where we may be going.
