Economic Indicators

We use economic indicators to indicate the strength of the economy. There are three types of economic indicators:

1. Leading Indicators

2. Coincidental Indicators

3. Lagging Indicators

The first category is for the leading indicators. These indicators tell you about a change in the economy before it actually happens. For example, imagine the number of building permits currently being processed. If there are a lot of buildings that are being permitted, it means there’s going to be a lot of economic growth. People are going to be investing more in the economy, the money supply is going to increase. Building permits would tell us ahead of time what’s going to happen in the economy.

Then we have the coincidental indicators, which occur at the same time as the business cycle change. Gross domestic product (GDP) is a good example of a coincidental indicator because it measures how the economy is performing at the moment.

Lastly, we have the lagging indicators. These tell us how the economy is doing after the change has already happened. Lagging indicators are used to confirm what we thought was going to happen. One example is the debt-to-income ratio, which is how much debt people have compared to their income level. If we have a high debt-to-income ratio, then we’re already in a really bad economic situation (i.e., the change has already occurred).