Economic Indicators That Help Predict Market Trends

Economic indicators often make the news—even a general newscast will include them at the wrap-up. However, if the broadcast opens with what they’re showing, then you know the economy is in trouble. That’s because economic indicators are as important for charting our collective economic future as a dashboard is for driving a car, and most people don’t start focusing on their dashboard gauges unless there are problems with the vehicle.

Knowing how to interpret these indicators can give investors an edge in anticipating market moves before they happen or allow employees to get a better sense of whether economic trouble is ahead.

The Three Types of Economic Indicators

Economic indicators fall into three categories:

• Leading indicators signal future economic events and market changes before they occur. These forward-looking metrics include the stock market itself, building permits, manufacturing orders, and consumer confidence surveys. Investors prize these indicators most highly because they provide advance warning of economic shifts, typically three to 12 months before broader economic changes materialize.
• Coincident indicators measure current economic activity and change simultaneously with the economy. These real-time gauges include metrics like GDP, industrial production, personal income, and retail sales. While they don’t predict the future, they confirm that economic shifts are indeed happening and provide context for leading indicators.
• Lagging indicators change after the economy has already begun to follow a particular trend or pattern. These backward-looking measures include the unemployment rate, corporate profits, and inflation. Though they don’t forecast future events, lagging indicators are valuable for confirming long-term trends and validating what leading indicators previously suggested.

The power of economic indicators lies in their relationships—when multiple leading indicators point in the same direction, that’s when you should definitely take notice.

Market Indexes

For an economic indicator to have predictive value for investors, it must be current, it must be forward-looking, and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about:

• Stock and stock futures markets
• Bond and mortgage interest rates, and the yield curve
• Foreign exchange rates
• Commodity prices, especially gold, other metals, grains, and oil

Although these measures are crucial to investors, they are not generally regarded as crucial economic indicators—the stock market, after all, is not the economy. Charting the history of indexes over time puts them in context and gives them meaning. Below, we can see how economic shifts in the 2020s coincided with changes in the S&P 500, which represents the prices of a selection of the 500 largest publicly traded U.S. companies.

Indicative Weekly Data Reports

The Unemployment Insurance Weekly Claims Report is released weekly by the Department of Labor. In a weakening economy, unemployment filings trend upward. They are generally analyzed as a four-week moving average (MA), to smooth out week-to-week variance. Increasing claims suggest a weakening economy.

This report is viewed as having a built-in bias because self-employed people, part-timers, and contract employees who lose their jobs do not qualify for benefits and thus are not counted.

Indicative Monthly Data Reports

The Monthly New Residential Construction report, commonly referred to as housing starts, is released by the Census Bureau and the Department of Housing and Urban Development. The report breaks out the number of building permits issued, housing starts, and housing completions.

This is considered an important leading indicator because construction activity tends to pick up early in an expansion phase of the business cycle.

Existing Home Sales

The Existing-Home Sales news release is released by the National Association of Realtors. While the housing starts report focuses on supply, this report focuses on demand.

Together, the New Residential Construction and Existing Home Sales reports are used to assess the overall health of the housing sector.

The data contained in this report is typically two months old, given how long it takes home sales to close. It is useful in predicting consumer spending.

Consumer Confidence

The Consumer Confidence Index (CCI) is released by the Conference Board, a nonprofit business research group. This is one of a handful of reports that measure and track the perceptions and attitudes of consumers, and how they regard their personal financial wellbeing.

The results are inexact and imprecise, but the Consumer Confidence Index has proved surprisingly accurate in projecting consumer spending, which typically accounts for around two-thirds of U.S. GDP.

Purchasing Managers Index

The Purchasing Managers Index (PMI) is released by the Institute for Supply Management, formerly the National Association of Purchasing Managers.

Despite its small sample size and focus on manufacturing, Wall Street watches it closely because it has historically been reliable in predicting growth in GDP.

Yield Curve

The yield curve shows the relationship between interest rates and bond maturities. Normally, longer-term bonds pay higher interest rates than short-term ones, creating an upward-sloping curve. When this pattern inverts—meaning short-term rates exceed long-term rates—it has historically signaled an upcoming recession. In recent years, though, it’s broken with that pattern, as we see below.

Investors monitor the yield curve by comparing the 10-year Treasury yield against the 2-year or 3-month Treasury yields. When the difference between these rates (the “spread”) turns negative, it suggests economic trouble ahead.

Producer Price Index (PPI)

The Producer Price Index (PPI), released monthly by the Bureau of Labor Statistics, measures average changes in selling prices received by domestic producers for their output. Unlike the Consumer Price Index (CPI) which tracks retail prices, PPI captures price changes at earlier stages of production.

This forward-looking quality makes PPI valuable for investors seeking early inflation signals. Price increases at the producer level often pass through to consumer prices with a lag of several months, giving investors time to position for changing inflation trends.

The PPI is broken down by industry and commodity groupings, allowing investors to spot inflation pressures in specific sectors. Sharp PPI increases in manufacturing inputs, for example, might signal future pressure on profit margins for companies that use those materials.

The Beige Book

The “Beige Book” (officially the “Summary of Commentary on Current Economic Conditions by the Federal Reserve”) is released eight times per year by the Federal Reserve. It includes a collection of discussions from each of the 12 Fed districts, along with a summary statement, all of which are presented in the non-committal, measured tones known as “Fed speak.”

Analysts and investors attempt to decipher the meaning of the report, which is much like reading tea leaves. The report foreshadows Federal Open Market Committee actions at the following meeting, although the bond market predicts these actions with a statistical measure that is virtually foolproof.

The Bottom Line

Leading economic indicators can give investors a sense of where the economy is headed so that they can adjust their investment strategies to fit future conditions. They are most useful when they’re tracked over time so that the larger trend can be seen.

Indicators are not perfect and can always be upended by unexpected events. Even so, watching which way the economy is moving and adjusting your investment choices accordingly makes sense.