Economic Indicators: Why Are They Important?

A key aspect of better understanding how markets work is understanding how leading economic indicators  affect them.

Stock, bond,  real estate, and other markets, are all affected in some ways by how leading economic indicators are performing.

I’m not asserting that you can predict how any market may respond based on an indicator.

That’s not the purpose of this post. The purpose is increased financial literacy, hopefully leading to a more accurate assessment of your capacity for investment risk (or,bluntly, being able to absorb market corrections).

So, what are the leading indicators?

Here are salient ones and why they are important:

1. Employment: More employed people means a healthier economy. It means one in which consumer spending likely increases, leading to increased sales for all affected companies, driving higher profits and increased dividends for shareholders.

2. Consumer Confidence: A measure of how confident the public feels about spending. If the index is increasing, then it’s a sign that consumer spending likely will be going up in the near future, positively impacting the revenue of related companies and manufacturers.

3.  Existing Home Sales: If home sales are increasing,  its a sign that consumers are confident in their future (how else can you rationalize committing to such a significant purchase?). It also means that a wide array of companies will be positively affected as a result of a home purchase, including home improvement stores, home furnishing stores, and even insurance companies (homeowner’s insurance).

This trio is not inclusive of the leading indicators, it’s just representative of them.

There are also lagging indicators and coincident indicators.

But having a grasp of the key leading indicators leads to better understanding the connection that can exist, for better or for worse, between the economy and market behavior.