Economic Indicators

An economic indicator is a relatively simple or straightforward variable that, on the basis of past experience, can act as a signal for changes in a set of other, often more complex variables in the economy. To some extent a single economic indicator can act as a “proxy” for a combination of other variables. New business start-ups, for instance, can indicate a whole set of interconnected changes in the business sector and the wider economy. In the United States in the 1920s and 1930s, “freight car loadings” were reported on the business pages of newspapers, and these were avidly read by investors, business managers, politicians, and others, as the movements of raw materials and finished goods around the American railway system was, at that time, believed to be a reliable indicator of the general health of the economy.

In business terms, an economic indicator can be used as a piece of information that assists in managerial decision making. Indicators can also be used by governments in order to guide future policy, such as plans for raising revenue and the setting of priorities for the allocation of government expenditure.

Leading and Lagging Indicators

A “leading” indicator is a variable or a series of statistical data that can be expected to anticipate changes in some related areas of the economy, and which usually precedes the changes by a fairly consistent time period. A leading indicator can therefore be used to make predictions and forecasts. For example, if demographic trends show that there is likely to be a significant expansion in the relative size of the 16–25 age group among the male population in a few years' time, then it is reasonable to predict that the country in question is going to experience a “crime wave.” This is because, in many countries, most crime is committed by young men. Such information would be of interest to, among others, government departments concerned with crime and justice, companies supplying private sector prison facilities, and the insurance industry that can expect to be called upon to underwrite and compensate for the financial costs of crime to individuals and businesses.

Leading indicators such as investment plans, orders for machine tools, and new house-building starts can be combined to construct a measure of “business confidence,” which in turn can help predict cyclical changes in gross national product. Similarly, “consumer confidence” is linked to variables such as future spending, output, and incomes, through economic mechanisms such as the multiplier principle.

A “lagging” indicator is a variable or a series of statistical data that can be expected to reflect earlier changes in some related areas of the economy, and which usually follow the changes by a fairly consistent time period. A lagging indicator can therefore be used to make an analysis of previous trends in the economy, or a diagnosis of previous problems with a view to avoiding similar problems next time around. The inflation rate, for example, is calculated using recent historic data concerning price movements within a statistically constructed “basket” of typical goods and services. If an analysis of the inflation rate shows that its causes are demand led, then an appropriate policy response (such as an adjustment of the interest rate) can be prescribed as a solution.

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