Economic indicators can be divided into three categories: leading, lagging, and coincident.
- Leading economic indicators
Leading economic indicators change before the actual changes in the economy. They are the most important economic indicators for forex participants as they help forex traders to make predictions about future economy conditions.
- Coincident economic indicators
The coincident economic indicators are those that change at the same time the overall economy does. An example of a coincident indicator is the Gross Domestic Product.
- Lagging economic indicators
A lagged economic indicator is the one that changes after the economy has already done that. They are helpful for forex traders in confirming a trend. An example of a lagged economic indicator is the unemployment rate.
The following represent some of the important economic indicators that forex traders should consider:
Gross Domestic Product (GDP) and Gross National Product (GNP)
The Gross Domestic Product indicator represents the total amount of goods and services that have been produced within the borders of the countries either by local or foreign producers. GDP is considered the widest indicator of a country’s economic state and shows the pace at which the economy of that country is growing.
The Gross National Product excludes the goods and services by foreign producers, but includes the goods and services produced by local companies operating in foreign countries. In other words, the GNP includes all of the goods and services that have been produced by the US citizens either within the borders of the country or outside it. At a macro scale, this indicator includes:
- Consumption spending – Personal income and discretionary income are the factors that make the consumption spending release possible. The trend of consumers, generating discretionary incomes, to start buying more than saving is measured by the consumer confidence indicator. Consumer and consumption spending are coincident economic indicators.
- Investment spending (also known as Gross Private Domestic Spending) – This indicator consists of fixed investment and inventories.
- Government spending – This indicator has an impact on the other economic indicators due to the nature of the special expenditures that are included (for example government spending on military).
- Net trade – This indicator is a major component of the GNP. The flow of product and the flow of cost represent the two basic approaches by which GNP can be examined.
The difference between the GNP and the GDP is of a nominal character for the developed countries, but for the smaller, developing countries, it can be substantial.
Consumer Price Index (CPI)
The CPI reflects the change in the prices of a fixed bundle of consumer goods and services. This indicator is useful to forex traders in determining the levels of inflation experienced by a country.
Producer Price Index (PPI)
The CPI indicates the cost of the goods paid by consumers, whereas the PPI indicates how much the producers are getting for these goods. The data that is used for the compilation of this indicator is gathered from industries such as agriculture, manufacturing, electric utility industries and mining. The PPI is also used to measure inflation.
These indicators include unemployment rate (percentage of the unemployed work), level of civilian employment, average hourly earnings, average weekly hourls, labor productivity and show how strong the labor market is.
The unemployment rate is an important indicator of the the economy’s strength while the average hourly earnings impacts inflation. The level of civilian employment is a coincident economic indicator while the unemployment rate is a lagging economic indicator.
Employment Cost Index (ECI)
The Employment Cost Index measures the cost of labor and includes wages, bonuses, and benefits. The ECI is also considered an inflation indicator.
Retail Sales Index
The Retail Sales Index is another indicator of the state of the economy. It measures the goods sold within the retail industry, sampling all sizes and types of businesses in retail trade.
Durable Goods Orders
Durable goods are defined as products which last an extended period of time (more than three years). The durable goods orders report shows how much consumers are spending on their long-term purchases and is considered an indicator for the future state of the manufacturing industry.
Consumer Confidence Index
Consumer confidence measures the confidence consumers have in the stability of the economy and their spending power. The Consumer Confidence Survey in the US uses as a sample population the responses on about 5,000 households. According to some analysts high consumer confidence and the consistent spending that goes along with it can cure a slumping economy.
Purchasing Managers Index (PMI)
Currently called the Institute for Supply Management, the National Association of Purchasing Managers (NAPM) releases a monthly index which can be used to predict the expected growth in the manufacturing sector.
Industrial Production (IP)
This indicator measures the change in the production of the country’s plants, mines and utilities as well as their industrial capacity and the capacity utilization. The country’s overall industrial production can be used as an indicator of the strength and stability of its economy.
The Housing Starts monthly report provides three metrics: housing starts, building permits and housing completions. Some analysts use the housing starts report in order to make estimates for other consumer-based indicators. Both housing starts and building permits are leading economic indicators.