7 of the Best Leading Economic Indicators
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Part 1 of Our Comprehensive List of the Most Powerful Leading Signals
Market analyst’s jobs are to study current and historical trends to come up with a forecast for the market. They merely make predictions. Sometimes they are right and other times wrongs. But, what is scary is that they can often be more wrong than right.
So, solely relying on these analysts’ advice is not always a good idea. It’s important as a professional trader to be able to read the same information and draw your conclusions based on leading and lagging signals. And while this won’t necessarily protect you from poor forecasts, it will give you a sense of autonomy and power to have a firmer grip on your finances and the future of your investments.
There are two groups of economic indicators that traders should familiarise themselves with: Leading and Lagging. Leading indicators will change before significant adjustments and are used to predict future market moves. Lagging indicators reflect the historical trends of the market.
In this article, we describe the seven best leading indicators for predicting the future movements of the market:
The Stock Market
- Determine whether the market will either grow or contract based on where earnings estimates take it just by looking at a company’s stock prices,
- The active market means that earnings are up, and the preparation is for a robust economy.
- If earnings are down, the market will indicate a negative trend.
- Problems with this indicator – earnings can be inaccurate; the market can be manipulated; Governments and Federal Reserves allow the market to remain artificially high to force an economic crisis; traders and companies are able to inflate numbers to influence and direct the market; bubbles give a false impression on the real direction of the market.
- This correlates directly to a few other market indicators.
- Refers to inventory, manufacturing output, and manufacturing sales growth.
- Increased sales give a direct boost to Gross Domestic Product GDP, and companies have the opportunity to hire more staff, in turn, providing jobs to citizens and improving their earnings.
- It does not show how consumers are paying for their goods. For example, consumers are taking on debt to acquire new products, and this can be a sign of a future recession.
Real Estate Market
- A few bells and whistles set off when the prices of the housing drop on the market.
- This shows that: supply has outnumbered demand; housing prices are too high, therefore moving the market into a bubble; people can’t afford current prices.
- Whatever the cause – housing declines do intensely hurt the economy in several ways as homes become worthless; construction jobs will take a dip; property taxes decrease meaning less revenue and homeowners are probably not able to refinance or sell their homes.
- To forecast the future – look at housing values and sales – a decline in sales points to the value dropping, soon after.
- Manufacturing Output numbers have two broad interpretations: 1) An increased GDP may show that there is more demand from consumers. 2) Goods are sitting in storage and not making it to consumers, which increases costs to hold the products. May not be suitable for that business.
- When looking at this indicator, it’s important to view it alongside local numbers to determine which of the two is the case.
New Business Ventures
- Take a look around for new business ventures. This is the best way to gauge the shape of the economy.
- Groups of businesses, small and large, are likely to place positive movement in the unemployment statistics.
- Small businesses can contribute significantly to GDP.
- Take note of this – the same indicator can mean two different things: 1) High supply levels mean that businesses intentionally stockpile goods in preparation for future demands. 2) A company may misjudge their consumer demand, and a wave of consumption may not purchase the supplies.
Issued Building Permits
- Active construction industries show that there’s a rise in jobs. Many permits are issued, meaning a boost for the GDP also.
These seven indicators provide the best tools for judging the status of the health and direction of a countries market. These are still subject to tricks that mislead and throw you in the wrong direction. So make sure you pay close attention to be prepared for sudden movement and activity and always use your best judgment.
Check-in for Part 2, the next article, “9 of the Best Lagging Economic Indicators”.
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