Macroeconomic indicators are a key part of fundamental analysis. Their statistics provide insight into the state of a particular country’s economy. Macroeconomic indicators are important tools to assess the current and future health of the economy and financial markets. Macroeconomic indicators can be broadly divided into two categories: leading and lagging indicators.
Leading Indicators
Leading indicators predict a change or movement in the economy and forecast where it might be heading. They can be useful for investment and trading strategies as it helps traders and investors anticipate future market conditions. In addition, governments, central banks, and businesses use them to make strategic decisions by anticipating how future economic conditions may affect markets and revenue.
Top Leading Indicators
- The Stock Market. The Stock Market is a predictive indicator that represents the health of the business and the economy. If the stock prices rise, it means there is more confidence for future growth. On the contrary, a fall in the stock market may mean traders and investors will look for safe-haven assets, moving their money out of shares.
- Yield Curve. The Yield Curve is a line on the chart that represents the income to receive in return for buying or holding a bond. The changes in the shape of the curve are used to predict the economic outlook and growth. A positive upturn can be the result of a growing economy, producing a steep yield curve. When the economic future becomes uncertain, the yield curve flattens because short-term bond yields rise faster than long-term, meaning investors will accept the same amount of money for both. If the yield curve becomes inverted, it can be a sign of an upcoming recession because short-term bonds yield more than long-term ones, expecting the economic growth to slow down.
- Manufacturing & Production. An increase in manufacturing and production can positively impact gross domestic product (GDP) figures, leading to a sign of positive economic growth from increased consumption. Employment rates are also affected by production levels, as it gives an idea of how confident businesses are in terms of expansion. If there are more jobs available, companies could possibly have an excess of orders to fill in, but when they stop hiring, it can mean they are cutting back to prepare for a period of decline.
- Housing & Real Estate Market. Housing and the real estate market give information about the state of the economy in advance. A weakened housing sector can impact homeowner wealth, construction, and taxes, just like what happened with the 2008 recession. The mortgage crisis was an early symptom of what later became a global financial crisis. Additionally, the number of building permits can represent an indication of growth. Companies apply for these permits months before the construction of new projects, meaning they expect a higher demand for housing.
- Interest Rates. Interest rates can be considered both leading and lagging. They can be considered lagging in the sense that central banks decide to increase or decrease rates after an economic event or market movement. Nevertheless, they can be leading because they can have a great influence on banks, consumers, and businesses after the decision. For instance, central banks tend to raise interest rates during periods of economic growth which may help prevent the economy from growing too quickly. However, increased rates essentially mean banks will have to pay a higher rate to obtain money. This will increase the cost of borrowing for consumers.
Lagging indicators
Lagging indicators are financial signs that become apparent after an economic shift has taken place. They confirm the strength of a given trend but are not used as a prediction. Traders and investors use them because they reflect an economy’s performance by trailing the price action of an underlying asset. This is useful because leading indicators can often be volatile, as they are used to forecast and make predictions. If we look at lagging indicators, we are confirming whether a shift in the economy has actually happened.
Top Lagging Indicators
- Gross domestic product (GDP). GDP is the total monetary value of the finished goods and services produced within a country, reflecting the economic health of the nation. Governments can identify whether the country’s economy will grow or will enter a downturn. If a country’s GDP has a consistent growth rate, it is a sign that the economy is stable. Traders and investors use GDP performances to make decisions about allocating their assets and investing in fast-growing economies.
- Unemployment rates. Unemployment rates measure the labour force of a nation. If the unemployment rate increases over a period of time, it can be a sign that the overall economy is declining. Consequently, earnings, consumption, and production will fall, resulting in an overall lower GDP and poor economic health.
- Inflation. Inflation is the result of economic growth or decline that can impact the price of a country’s currency as well as employment or GDP growth. High inflation rates can increase interest rates and declining levels of inflation or ‘deflation’ reflect that consumers reduce their spending, leading to a reduced money supply and rising unemployment rates. One of the most important tools to measure inflation or deflation is the Consumer Price Index (CPI).
- Balance of trade. Balance of trade is the difference between a country’s value of imports and exports that states whether there is a trade surplus or trade deficit. A trade surplus indicates that there is more money coming into the economy than leaving it. On the opposite end, a trade deficit shows that there is more money leaving the country than coming in. In the long term, a trade deficit may lead to significant debt, consequently reducing the stability of the local currency. However, if a trade surplus is high, that would contribute to economic growth in a country due to its high level of output and would tend to boost the currency of a country.
Why are Macroeconomic Indicators Important?
Macroeconomic indicators can have a great impact on market movements and provide evidence of relative economic strength or weakness. It is important for traders and investors to use a wide variety of different indicators in order to get a better understanding of the overall market. The economic calendar covers all important financial events and indicators that impact financial markets.
