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College Finance: The Three Types of Economic Indicators

Leading, Lagging and Coincident indicators confirm what is happening in our economy. Add to your investment knowledge by learning what they mean.

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Successful investors are good at processing information. They can relate numbers and statistics to stock and bond prices. Among the most important numbers are the various economic indicators published by the government. These numbers help explain where interest rates - the mother of all stock movers - are going. Here is a run down of what those indicators are saying.

Three Types

There are three types of economic indicators: Leading, Lagging and Coincident.

Leading

Leading indicators help to predict what the economy will do in the future. Leading indicators are often the most useful for an investor. An example of a leading indicator would be hours worked per employee. If the hours are rising, firms should increase hiring some point in the future.

Lagging

Lagging indicators confirm what leading indicators predict. Lagging numbers change a few months after the economy does. For example, the unemployment rate is a lagging indicator. Generally, the unemployment rate will fall after a few months of economic growth. If the leading indicator of hours worked is increasing, after a few months the lagging indicator of unemployment should fall.

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Coincident

Coincident indicators mirror what the data is saying. Coincident indicators are generally what is happening right now, for example, the jobs report. If a leading indicator is predicting future job gains, a lagging indicator is saying unemployment is falling, a coincident indicator will tell you the current employment number.

How the Federal Reserve interprets all this data is a mystery to everybody but the fed governors. Some economists think the fed is a lagging indicator institution while others believe it mostly watches leading indicators. One clue could be the beige book. The beige book is a bunch of economic data, such as housing starts and construction activity, that is published by The Fed. The Fed releases the beige book eight times a year, just before their decision on interest rates. The public has a chance to read over the report and predict what the controller of rates has in store.

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