As we mentioned above, economic indicators are snapshots that highlight different aspects of economic activity. However, it would be virtually impossible to capture all the data needed in real time. For that reason, indicators are given one of three classifications:
Leading indicators - A phrase you’ll hear frequently in the media are reports on leading economic indicators. A leading indicator means a data point or a trend that begins to happen before it is detected in the overall economy. In this way leading indicators are said to signal what may happen in the future.
These indicators include but are not limited to retail sales, housing starts and new home sales. The stock market, while not an economic report, is also considered a key leading indicator. An increase or decline in these forward-looking areas may trigger a subsequent increase or decrease in other areas of the economy.
Lagging Indicators - The opposite of leading indicators are lagging indicators. These indicators provide data that point out what is already being reflected in the economy. In other words, they are telling investors what has already happened.
Lagging indicators include some of the most closely watched indicators such as unemployment (for people to be counted in the survey they have to already be unemployed), Gross domestic product (which tells you how strong the economy was at a certain period of time). The Consumer Price Index (CPI) which provides a broad measurement of inflation is also considered to be a lagging indicator as are business inventories. In these cases, analysts look to assess the strength of a trend.
Coincident indicators - As the name suggests, coincident indicators are occurring at approximately the same time as the changes they are signaling. Personal income would fall into this category because these should rise as an indication of a strong economy. Conversely, investors would expect personal income to decline in an economy that is weakening. Interest rates are another closely watched economic report that is considered a coincident indicator.