Economic indicators refer to various statistics that represent the activities, conditions, and performance of a country’s economy. Those statistics come from government institutions or private organizations. Not only past and present economic conditions, but some statistics also provide insights on future economic conditions.
Classification of economic indicators
In literature, economic indicators are divided into three groups. Economists usually use them to explain economic activity, mainly related to an economic cycle.
- Leading indicators
- Coincident indicators
- Lagging indicators
The movement of leading indicators precedes of broader economic turning points. For example, when economic growth falls, this indicator has predicted a decline several months before the release of economic growth data. For this reason, economists use it to predict future economic conditions.
An example is a new order for capital goods. Businesses will usually predict their future demand and profit conditions before deciding to increase production and invest in capital goods. They will order capital goods only if they are optimistic about future growth. And, they will delay it if they are pessimistic.
Coincident indicators move in tandem with broader economic movement. Economists use it to identify the current condition of the economy.
An example is an industrial production. Its change will usually go hand in hand with economic growth.
Lag indicators move after the economy has changed direction. Economists use it to identify past economic conditions.
The inventory/sales ratio is an example. This ratio responded after the economy moves. Inventory built up after demand drops and shrank after demand begins to increase.
Interpreting and drawing conclusions from many economic variables is a difficult task. Therefore, practitioners develop a composite index, which provides an aggregate perspective on economic conditions. That is known as the Index of Leading Economic Indicators (LEI) or Composite Leading Indicators (CLI).