Leading indicators

- I have a good friend whose email signature has the quote I just want tomorrow's Wall Street Journal today. In other words he wants to be able to know the economic future before it happens. Many people feel this way because the economy impacts their jobs and investments. Economic indicators that offer a glimpse into the future are called leading economic indicators because they lead economic growth. Those reflecting the present are called coincident economic indicators because the data they include best coincides with current economic activities. And there are economic indicators that show the past called lagging economic indicators because they lag behind the actual dynamics in the economy. In short, if you wanna feel like you're reading tomorrow's Wall Street Journal today you wanna be watching leading economic indicators closely. And there's even a report that focuses on these indicators called the Leading Economic Indicator Index, which is produced by the organization known as the Conference Board. This Leading Economic Index often called the LEI is a useful tool because it includes 10 different components. Think of it as a forward looking spicy data goulash. These 10 components for the U.S. are related to a number of key topics including two data parts for jobs, three data parts for manufacturing orders, and the LEI also includes data related to housing, equities, credit, and expected business conditions. As you can see the LEI is a basket of leading data points that are widely known to be as a whole a good predictor of future market trading and economic growth. This is why one of the main purposes of the LEI is to signal peaks and troughs in the business cycle. Most people who trade actively in markets can trade a trend like when the market's are going up or they're going down. This is especially true for technical traders. But the biggest questions in trading and risk and strategy usually are where are the peaks, where are the troughs. In other words how do I know that I've made all the money I'm gonna make and it's time to sell, and conversely how do I know when it's time to buy again. In sum, bottoms and tops are tougher to identify, but that's what the LEI does. And as financial traders are known for saying, you have to be careful when picking bottoms because when you pick bottoms, sometimes all you get are stinky fingers. While traders may be moving money around this indicator, economists often bet something bigger on the LEI, their reputations. When on recession watch, economists look to the LEI to confirm or refute their concerns about the economy. I remember speaking to one economist in early 2016 when U.S. business investment was in recession. And other economic indicators were mixed, some were positive but some were pointing to a recession as well. He wasn't ready to call an eminent recession just yet because the LEI hadn't weakened enough. He was right, and it was because he was watching the LEI. In 2018 as equity markets were hitting all time highs and consumer confidence returned to levels not seen since 2000, the LEI was still being watched closely for topping. For the average person like you and me the LEI is important because if it falls your investments could tank as well and your job may be at risk. The LEI isn't just focused on one market though like autos or housing, it's important for the entire economy which means that if it falls and signals a recession, companies across the economy could take a hit. Amazon and Caterpillar, Disney and Ford, Apple and Exxon. No matter where you're investing in the U.S. economy you are likely exposed to a major drop in the LEI. Of course continued rises in the LEI are likely to be positive for your investments across the economy. For overall activity especially at those important bottoms and tops of growth, the LEI is a critical indicator to watch.