- Leading Indicators Example — Leading Indicators Technical Analysis
- Leading Indicators
- Leading Indicators Example
- Leading Indicators Technical Analysis
- Leading Indicators Trading
- Best Leading Indicators for Day Trading
- Best Combination of Indicators for Day Trading
- Best Leading Indicators
- Rubber-Band Trade Strategy
- GET MY FREE MARKET ENTRY TIMING INDICATOR
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- Leading Indicators Defined and Explained
- What are some examples of leading indicators?
- Benefits of leading indicators
- Become a Better Trader with Our Trading Tips
- Leading Indicators in Economics (Definition, Examples)
- How are Leading Indicators Helpful?
- US economy list of indicators
- Germany economy list of indicators
- Leading Indicators Methodology
- Recommended Articles
- Leading vs. Lagging Indicators – Who is the Clear Winner
- Leading Indicator Overview
- Other Leading Indicators
- What is a Lagging Technical Indicator?
- Lagging Indicator Trading Example
- Ride the Trend
- Exiting at Tops or Bottoms
- Best Time Periods
- Drawbacks of Leading and Lagging Indicators
- Combining Leading and Lagging Technical Indicators
- Leading vs. Lagging Indicator – Which is Better?
- Lagging and leading indicators
- Lagging and leading indicators explained
- Lagging indicators
- Leading indicators
Leading Indicators Example — Leading Indicators Technical Analysis
Leading Indicators are often taken for granted by most traders nowadays. Many say there’s no such thing as a leading indicator. They even take pride in saying they only use pure price action and volume. This most of the time leads to high-risk trading.
To better predict the movement of the markets today, one of the best ways is to study what actually leads them; that is, Leading Indicators.
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Hey, welcome to this video on leading indicators examples.
However, there is no such thing as an indicator that always leads the market, so you have to put it in the context of an entire trading method, just you do with everything.
There’s no one indicator that’s going to be the crystal ball as to what’s going to happen in the next five minutes or five months in the market. That’s not how it works. We use it as a piece of the evidence.
Leading Indicators Example
So one of my most popular videos is on the SMI indicator or stochastic momentum index. We’ve got that down here and I’ll use that one today because, in the traditional technical analysis, momentum indicators are generally accepted as leading indicators. And I to add the word potential to that because most of the time, they don’t lead to the market.
So you have to understand what type of patterns do, when they do, and so forth. So, first of all, let’s look at something very interesting that people don’t understand. First of all, that’s not an indicator. Stochastics is not an indicator. SMI is not an indicator. CCI, when we just plot it here, in other words, that’s really not the indicator.
Let’s look at what the indicator really is.
Now that’s the indicator. So it might be semantics, but my point in showing you this is, and this is just part of the formula and this is the SMI, the stochastic momentum index, indicators are mathematical formulas. So let’s just get real clear on that. First of all, that’s what they are and that’s all they are.
So it is true that they do not always tell the future. But let’s put it this way. What do indicators do? They indicate! The answer is actually in the question. They indicate. Indicators are not money makers. There’s no one indicator in the world that will directly and by itself make you money. If they did, we wouldn’t call them indicators.
We’d call them money makers.
Leading Indicators Technical Analysis
So they indicate something math. Here’s one example. What it’s taking is it’s taking data from whatever market you’re trading relative to whatever time interval you’re trading. And it’s putting everything into one side of the formula, crunching it the formula, and then spitting a number out the other end.
So what that means is that an indicator actually is never wrong, indicators are correct 100 percent of the time because it is math. So one of the reasons that I do to use a couple of indicators is that it gives me an objective number to work with a value of the energy of money flow that is going to that market.
And it’s always right because it’s math. It is math! It is not math, it is math. And, therefore, it allows me to create an objective rule-based system a mathematical formula; actually a combination. So let’s go back to the chart now.
We’ve got our SMI here, stochastic momentum index. Remember, momentum is one of the most commonly accepted leading indicators. And we’ve got the market going down here. Now at this place, you will see what is commonly referred to as a divergence.
So we have a lower low on price, higher low on the stochastic momentum index. Now, what does that really mean? What’s behind that? We’ve all heard what divergence is, or at least most of us who’ve been around for a while.
And so a divergence is nothing new, but a divergence by itself, frankly, they don’t always work.
Leading Indicators Trading
So again, this is what I mean by, sometimes in certain situations, these indicators can give you leading ideas. Now, here’s what this is. First of all, what momentum means is the market’s going down and it’s going down on strengths. So think of a train going down the tracks and let’s say that train is going 90 miles.
Well, let’s say it’s going 60 miles an hour and it’s got 30 cars behind it. Hence, it’s kind of velocity and mass. That is the equation for momentum ranked just the basic physics of it in the real world. In the same way in the market, when you’ve got the market moving with velocity and mass, it’s more ly to follow through.
So back to our training example, if you are to apply the brakes to a train that was going 60 miles, having 30 cars behind it, the train is not going to stop right away. There’s a leading indicator of just the pure physics of momentum.
After you apply the brakes, that train is still going to continue to go north a mile after you apply the brakes, cause that’s the physics of momentum.
So, in a similar way in the market, when the market is moving with velocity, a lot of mass; massive waste volume, then we can say it will probably sustain and when the brakes are applied, it’s going to start slowing down. Now, where is the brake applied?
Best Leading Indicators for Day Trading
So here is our signal that we’ve had a momentum shift. Price does make a lower low, in other words, the train is still going, in this case, south. But the brakes were applied back here and this maps it for us.
That’s one of the nice things about indicators, they just map that dynamic flow on a chart. That’s why it’s actually very easy to see.
Now you could do the same kind of thing if you’re a tape reader, but that actually requires quite a bit of skill and experience. So this is a shortcut.
But that’s not all because what we want to do is we also want to say ‘how extended are we in this trend?’ We all know the saying ‘the trend is your friend until the end’. If you get a momentum shift this early in a new trend, it is probably not going to really mean much. You might get a little ABC complex retrace and then continue down in the direction of the trend.
So the longer you wait; we’ve got a failed nine wave count here, and five in the way that count-wave is average. So, anytime we get beyond five, now we are saying statistically, this is a trend that has lasted longer than is normal. And now we wait for strengths to come that downtrend to help us determine when the trend will end. So this is the signal that it will end.
Best Combination of Indicators for Day Trading
Now, something very important, ‘where does the market go?’ Kind of going sideways for a while. So, the learning moment here is that just because momentum did come the market and sure we did stop trending, we did not get below that bar.
That does not mean the markets then going to go screaming up; a downtrend is not always followed up by an uptrend. Uptrends aren’t always followed by downtrends.
Trends can end, in fact, I would say trends more frequently end by just going sideways for a while and not reversing. This is why I turned.
Reversal trades are so tricky. They do have the best reward to risk ratio when they work, but they don’t actually work ten. So the win-loss ratio is low. I wanted to give you one more example because I showed you how to determine the end of a trend.
Well, how do you get in early to a new trend because that is a more common way of a better win-loss ratio? Here, we’ve had a market just kind of, basically, not doing too much and even in here, right? It’s still kind of going sideways. But look at momentum. What is momentum doing from here to here? It’s still about the same and then it goes crazy? It goes way above that level.
In other words, momentum, in this case, the SMI is breaking above this level here on the indicator before price really makes significantly higher highs.
Best Leading Indicators
Price is still just going sideways. So what’s happening is accumulation. In Top Dog Training, we to take the first cycle low and a new uptrend, which is wave two right there. And we can do that inside of price consolidation knowing that momentum has already come in.
But now, here it is again, ‘how do we know to get out there?’ Well, momentum now has come the market, so price made a higher high, but the indicator, lower high. There are your common diversions. Therefore, it’s just a matter of time before we do start coming to an end.
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Leading Indicators Defined and Explained
A leading indicator is a technical indicator that uses past price data to forecast future price movements in the forex market. While there is no single indicator that forecasts future prices with 100 percent accuracy, traders will be able to view how price could unfold in the future and then apply further analysis to spot ideal entries into the market.
The opposite of a leading indicator is a lagging indicator and while they both make use of past data – lagging indicators use past data to project future price levels. Lagging indicators use past price data to confirm a recent change in price.
What are some examples of leading indicators?
The main, generally accepted, leading indicators include:
- Fibonacci Retracements
- Donchian channel
- key levels of support and resistance.
These will be presented and briefly discussed below.
In short, the Fibonacci retracement consists of numbers or ratios that are mathematically significant numbers that occur throughout nature and often in financial markets. The most important number or ratio is the 61.8% or .618 levels. In Forex trading, Fibonacci retracements can identify future possible levels of support and resistance.
The EUR/USD chart below shows maps out the direction that future prices may approach, if the 61.8% level is respected.
The 61.8% level was respected and the market resumed the broader downtrend and proceeded through the initial price target box to make a series of lower lows.
The Donchian channel calculates the highest high and the lowest low for the past X number of periods and presents this as an upper line and lower line. The upper and lower lines get updated as price continues to move.
The Donchian channel indicator is great for breakout or reversal trades in strong trending markets. For example, the USD/JPY chart below, shows how Donchian channels can help traders to trade a breakout
- Price starts out making lower lows and touches the lower bound of the channel before moving up.
- Price breaches the upper channel after a touch of the lower channel, providing the first bullish signal. A break of the upper channel after a touch on the lower channel is seen as the first signal for a long trade.
- The upper channel at point number 2 extends a horizontal line to the right, corresponding with the recent high. This acts as resistance and serves as further confirmation if price breaks above this level – which it does. Even though there is a large retracement, price does not breach the lower channel and eventually moves back up and past point 3.
A long signal is triggered when price rises off the lower channel (1) to breach the upper channel for the first time (2).
The upper channel line extends to the right and provides a level of resistance to be tested or respected. With a long bias, traders will be looking for price to break this level, creating higher highs.
Even though there is a large retracement between point (2) and (3), price does not breach the lower channel and eventually moved back up to create a new high at point (3).
In an upward move the one seen above, traders can utilise the lower channel as a manual trailing stop and adjust it upwards as the market advances.
Key Levels of Support and Resistance
Key levels of support and resistance occur when price approaches a particular level, multiple times, without breaking through it. This often results in price bouncing off two key levels in a range. Knowing where price has been before can assist traders to assess where the target should be placed.
In this example, price has approached resistance and turned, meaning the target should be placed at or just above support and a stop can be placed above resistance; while maintaining a positive risk to reward ratio. Price continued to move down and subsequently hit the target level.
Benefits of leading indicators
Leading indicators are by no means a crystal ball, but they do allow the trader to visualize the various ranges where future price could trade. When having an idea of future price movements, traders are better placed to identify targets and stops with a greater accuracy.
Leading indicators provide the following benefits:
- Presents a clear directional bias
- Provides traders with a target level
- Provides traders with a stop loss level
- Leading indicators are not limited to just one indicator
- Leading indicators can act as a filter (i.e. trades that do not line up with the indicator can be disregarded)
Leading indicators provide traders with indications of future price movements and by extension, clear stops and limits.
Due to the fact that there is uncertainty when trading the financial markets, traders cannot afford to adopt a laid-back approach to risk managemet simply because a leading indicator provides a direction and level for future price movements. Remember that prudent risk management should be adopted at all times.
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Leading Indicators in Economics (Definition, Examples)
Leading indicators are set of statistics about economic activities that help in macro-economic forecasts of the economy and emerging stages of business cycles across the industry by acting as a variable with economic linkage providing information about early signs of turning points in business cycles which precedes the coincident and lagging indicators.
How are Leading Indicators Helpful?
For macro-economic policy decision making it is necessary to know the state of economic cycle i.e.
whether the economy is in the expansionary phase or whether it is moving towards the recessionary phase so that counter-cyclical stabilization policies can be implemented.
For understanding the same, different data points of a series of economic variables are used which gives information about the state of the economy in past, present and future predictions. These data points are called economic indicators.
Economic indicators are categorized their timings into three viz leading indicators which forecast the turning points of economic activities, coincident indicators which give a real-time state of economic activities and lagging indicators which reflect the past economic activities.
Leading indicators help economists to predict the future trajectory of economic activities forecasts the direction of GDP and thus helps in better macro-economic policy decision making.
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US economy list of indicators
|Avg. weekly manufacturing hours||Employees on payroll (excluding agriculture)||Average unemployment duration|
|Avg. weekly unemployment insurance claims||Personal income levels||Inventory to sales ratio (showing inventory turnover/ buildup)|
|Manufacturers’ new orders in consumer goods and non- defense capital goods||Industrial production||Labor cost per unit of output|
|Vendor performance||Manufacturing and trading sales||Average prime rate Commercial and industrial loans|
|Building Permits Stock Index||Consumer installment credit to personal income ratio|
|Money supply and interest rate spread|
|Consumer expectation Index|
Germany economy list of indicators
|New orders||Industrial production|
|The yield spread 10 years compared to 3 months||Manufacturing and retail sales|
|Changes in inventories||Persons employed|
|Gross enterprise and property income|
|Services consumer price index- a growth rate|
|Consumer Confidence Index|
Leading Indicators Methodology
The leading indicator approach was first brought out post-1930 depression by Burns and Mitchell. Economic Cycle Research Institute (ECRI) founded by Dr.
Geoffrey Moore established the first list of 8 indicators viz, Commodity prices of sensitive commodities, Average workweek of manufacturing, Building contracts, New incorporations of companies, Orders released, Housing statistics, Index of Stock prices, Liabilities due to Business failures.
Later, the US conference board started publishing these indicators. From 1980, the Organization of Economic Cooperation and Development (OCED) started publishing CLI (Composite Leading Indicator) index for major countries.
- The first stage of leading indicator identification and indexing is to identify the growth cycles. In the growth cycle, an adjustment needs to be made for seasonality and short-term irregularities. The second is to identify turning points. Tuning points can be identified by Bry and Boschan’s rule and by Artis et al rule.
- Next, turning point indicators are assessed for quality by measuring the efficiency of leads through mean and standard deviation. Further analysis is done to identify indicators as per OCED guidelines, viz, cross-correlation, coherence and mean delay, Dynamic factor analysis, common component variable, cyclical classifications. Self-organizing maps can also be used for the selection of lead indicators.
- After the selection of lead indicators, an index is then developed to analyze and compare the movements. The index is developed through linear and non-linear frameworks. The linear framework can be created using the diffusion index – measuring the proportion of indicators of economic activities that are experiencing expansion in a given span of time.
Other methods are the Stock and Watson approach which uses a common trend principle, Autoregressive distributed lag method which uses GDP as a reference point. Nonlinear frameworks are a Probit model or logistics model where discrete regression analysis is used, Markov – switching autoregressive model is also used.
- Help to identify and predict future trends and events in the economy. They are used for forecasting the overall economic activity.
- Help in identifying and tracking the growth cycles in the economy.
- Help to take corrective measures in advance to counter economic trends.
- Lead indicators are major macroeconomic variables and help in macro-economic policy decisions.
- Monetary policy framework can be used as a countercyclical measure by relying on lead indicators
- Adequate early warnings of cyclical indicators of economic activities are provided by lead indicators.
- Help in getting the overall view of the economy, un the lagging indicators which focus on short term performance.
- These indicators are difficult to identify.
- Leading indicator measurement is difficult and may not be accurate.
- It involves qualitative factors and accurate quantification of the same may be difficult.
- Validation of lead indicators may be a challenge and they may not match closely with actuals.
Leading indicators are dynamic variables which help in identifying turning points in economic activities. Prediction of economic trends is possible by way of tracking such indicators through an appropriate index.
However, as they are not accurate, the actuals may not be equivalent to lead indicators.
Lead indicators help in designing macro-economic policies by designing countercyclical policies to tackle economic cycles of boom and busts.
They can provide early signs of upturn or downturn in GDP. Investors and government bodies can use these indicators to predict the direction of the economy and making importing investing and policy decisions. It thus helps in taking proactive actions to achieve economic and other strategic goals.
This has been a guide to what is leading indicators and its definition. Here we discuss the need and methodology for leading indicators along with the examples. You can learn more about finance from the following articles –
Leading vs. Lagging Indicators – Who is the Clear Winner
11 July 2018 , Al Hill ShareTweetGoogleLinkedinReddit
Indicators are at the heart of trading if you prefer technical analysis as your method of choice.
These indicators are relevant whether you day trade or swing trade. If you think of it, the entire industry of algorithmic trading would expire overnight without technical indicators and chart patterns.
Technical analysis at its core is about attempting to predict price movements in the market.
To take it one step further, technical indicators can be broken into two classes: leading and lagging indicators.
In this article, we are going to dive into both types to identify which one best fits your trading style.
Leading Indicator Overview
A leading technical indicator is designed to anticipate future price moves in order to give you the trader an edge.
As magical as this sounds, a leading indicator relies upon the most common variable – price.
Other examples of leading indicators of future market sentiment are candlestick patterns.
The chart below shows a number of candlestick pattern signals for the S&P 500 that signal a shift in market sentiment.
Despite the simplicity of this example, it is always best for a trader to confirm signals with other indicators.
Japanese Candlestick patterns signal market changes
An important aspect to bear in mind with leading technical indicators is that they are not always right.
Look at the above chart and you will find examples where despite a bullish signal, the security’s price dropped.
Remember, technical analysis is not a holy grail. Your goal is just to find a system or chart pattern that works out more than not.
Other Leading Indicators
Other examples of leading indicators include momentum or volume oscillators. These indicators focus on the principle that momentum or volume changes ahead of price itself.
Some additional leading technical indicators include the relative strength index (RSI) or volume, which is more easily recognizable. Volume tends to show changes even before price as it truly represents the ever-changing buying and selling pressures in the market.
Below is a classic example.
This is a 10-minute chart of Microsoft (MSFT) with the volume indicator.
Volume as a leading indicator
If you closely analyze price and volume, you can see that from the area marked ‘start’ and the subsequent rally in price, volume starts to fall. For someone who viewed the chart without volume would easily make the mistake of assuming the price trend was really strong.
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As price peaked near $66.30 posting a high, you can see that volume is not confirming the bullish momentum led rally, signaling that prices could fall.
Eventually, price makes another attempt at $66.30 and crashes strongly and this time the decline in price is confirmed by strong selling pressure as indicated by the strong volume bars.
What is a Lagging Technical Indicator?
A lagging indicator often makes use of price as an input variable and in most cases, requires a longer look back period in order to ascertain trends.
Even with the delayed feedback loop, many traders prefer to use lagging technical indicators as it helps them to trade with more confidence by validating their trade decisions. Usually traders make use of two or more lagging indicators to confirm price trends before entering the trade.
This can be viewed as a conservative way to trade, but do not let this draw you into a false sense of security that you can make money consistently.
Lagging Indicator Trading Example
Let’s look at a classic example of a lagging indicator set up which is a 50-period and a 200-period moving average. We know the golden and a death crosses, which are bullish and bearish crossovers of the 50 and 200 SMA’s.
Generally, the security is said to be bearish when the 50 SMA crosses below the 200 SMA and the security is said to be bullish when the 50 SMA crosses above the 200 SMA.
The following example shows the 50 and 200 SMA applied to the daily chart for QQQ ETF chart.
Moving averages as a lagging indicator
In the above chart notice the four signals generated by the bullish and the bearish crossovers of the 200 and 50 period moving averages. In the first signal , if one went short after the bearish signal, it would have been a losing trade.
This is because by the time price moved lower and the SMA’s reacted to this, price already fell significantly and started to pull back higher.
wise, in the next example we get a bullish crossover. If a trader were long on this signal, it would once again trigger a loss because we see that price pretty much stalls near the previous highs before falling lower.
The third bearish signal worked somewhat in our favor; however, price only fell a few points lower before starting to reverse.
Among the four signals, it was only one that worked as the bullish crossover signal saw a meaningful rally in prices thereafter.
What the above example tells us is that despite lagging, the lagging indicators are by no means fool proof.
Ride the Trend
The most noticeable difference is lagging indicators keep you in the trade by riding the wave of momentum.
In order for this to work properly you need to make sure you are configuring your favorite indicator with the right number of periods. Meaning you do not want to use a 5-period moving average on a 1-minute chart of a biotech company.
If none of that made sense, it’s okay. Basically, your lagging indicator will trigger you to close your trade too early if you use a tight lagging indicator on a volatile stock.
Exiting at Tops or Bottoms
Let me first say this is impossible, so do not waste your time trying to figure this one out.
However, once you are up sizably on a position, you do not want to give money back on the trade. Therefore, if you are trying to maximize your profits – leading indicators are the way to go.
For example, if a stock is spiking higher, you will want to look at the volume and maybe an oscillator to determine when to exit the trade. If you were to wait for a cross of a long-term moving average, you will ly have given back most of your gains.
Best Time Periods
This is something I want to demystify when it comes to leading and lagging indicators.
Just because you are on a shorter time frame does not mean you only care about leading indicators.
Regardless of the time frame, traders will want to use both leading and lagging indicators when trading.
Drawbacks of Leading and Lagging Indicators
Both leading and lagging indicators come with their own set of drawbacks. For starters, leading indicators tend to be choppy and react to prices quickly. This means that leading indicators are prone to false signals .
Conversely, lagging indicators are slow to react and again run the risk of eroding paper profits.
Combining Leading and Lagging Technical Indicators
Let’s see how a trader can use leading and lagging indicators to gain a better view of the markets.
The following chart shows a 15-minute time frame with the relative strength index (leading) and two exponential moving averages (lagging).
Example of using leading and lagging indicators
Here, we first notice a bearish divergence on the chart, identified by price making a higher high while the 14-period RSI makes a lower high. This bearish divergence is a leading indicator and informs the trader of a potential bearish trend.
Note that with leading indicators, there is a possibility for the signal to be invalidated. Thus, traders who typically would act on the signal from the leading indicator will be at a loss.
Getting back to the above example, you can see that after the leading indicator (divergence) signaled a bearish trend, this is confirmed by the moving averages bearish cross over.
The moving averages are lagging indicators and when viewed in the context of the bearish trend that was initially pointed out by divergence, the trader has better odds of trading this short signal.
You can see how powerful, yet simplistic it is to combine both leading and lagging indicators.
Leading vs. Lagging Indicator – Which is Better?
For traders, it is often the dilemma of finding a balance between using leading and lagging indicators. Rely solely upon leading indicators and chances are you will see a lot of false signals.
Rely solely on lagging indicators and you will ly hold on too long and give back most of the profits.
With these obvious drawbacks, it is best to develop a trading strategy that combines both leading and lagging indicators.
At the end of the day, it is up to each trader to decide how they want to trade.
Thus, there is no clear winner when it comes to choosing between leading or lagging indicators – consider it a tie!
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Lagging and leading indicators
- A lagging indicator is an economic statistic that tends to have a delayed reaction to a change in the economic cycle.
- A leading indicator is an economic statistic that tends to predict future changes in the economic cycle.
- A co-incident indicator is a variable that changes with the whole economy.
The recession of 2008 was very deep, but which statistics indicated it would happen?
Lagging and leading indicators explained
- At the start of a recession, we may get a fall in share prices and fall in consumer confidence – these are leading indicators of a change in economic mood; people expect fortunes to deteriorate and start spending less.
- As the economy goes into recession, GDP falls. This is the best co-incident indicator. Though we have to remember, GDP stats is initially an estimate, it may get revised up to three years later.
- Unemployment is often a lagging indicator.
It takes time for firms to respond to decline in output by getting rid of workers. Workers may be protected by contracts and so not lose job straight away.
- When the economy recovers, we will see a rise in business and consumer confidence and GDP rises.
However, it may take time for firms to have the confidence to find and employ new workers.
The UK recession of 1980/81 saw unemployment rising into 1983 – even when the economy had recovered. It took late into the 1980s for unemployment to fall in response to economic growth. However, after the 2008-12 recession, unemployment fell quicker, making it less of a lagging indicator, due to more flexible labour markets.
2. Consumer price index for services. In a recession, we will tend to see downward pressure on the price of services.
With higher unemployment, there is downward pressure on wages, and these will feed through into lower prices for services, such as hairdressers, cleaners, e.t.c.
In a period of strong growth, it will tend to put upward pressure on wages, increasing the price of labour-intensive services.
3. Quantity of loans
This shows monthly change in new loans. It doesn’t show total quantity of loans.
After an economic downturn, there will be a decline in the quantity of loans. People will stop taking out new loans and so the overall level will start to decline. But, after a period of economic growth, loans will be high.
Real GDP revisions
Usually, we would count real GDP as a coincident indicator. Real GDP is the indicator of economic growth. However, first estimates of GDP can be misleading and they often miss radical changes in GDP. Initial estimates often involve a degree of guessing and so miss out changes.
The above graph shows that initial estimates of real GDP were higher than final revisions 3 years later. First month estimates for economic growth in Q2 2008 was 0.2%. Yet three years later, this positive growth has been downgraded to -0.6 – a serious downturn.
The first-month estimate for Q3 2008 was -0.5%. But, three years later, this was revised to a much more serious -1.7%
When growth is more stable, revisions tend to be much smaller. We can see accurate real GDP stats as a potential delayed indicator.
- Consumer confidence
- Managers purchasing index
- Bond yields
- Money supply
- Consumer confidence. Often one of the best and quickest indicators of future economic activity.
source: GFK Consumer Confidence Barometer | 30 November 2012
Consumer confidence fell early in 2008, hinting at future falls in real GDP.
2. Purchase of capital goods. Investment in new capital is a barometer of the business cycle. If firms are confident about future demand, they will purchase more capital goods.
This purchase will, in itself, help increase economic activity. In the lead-up to a recession, you would expect firms to cut back on capital purchases.
This can be illustrated through indexes, such as IHS Markit’s Purchasing Manager’s Index, or PMI,
Source: ONS NPEN
Business investment fell in Q2 2008 – just at the time real GDP starts to decline. The trough of investment was a similar time to the upturn in real GDP.
Construction sector. The construction sector is an indicator of economic activity. It tends to be one of the most volatile sectors. Falling demand for new building permits is an indicator construction sector is going into a downturn and this will forewarn a larger economic downturn.
FTSE-250. The stock market may reflect investor sentiment. Expectations of recession causing share prices to fall, especially in critical sectors construction and travel.
Bond yields. A fall in long-term bond yields can indicate markets expect a recession and future cuts in interest rates. It also shows investors want the security of government bonds rather than more risky shares. A negative yield curve is an indicator of negative expectations.
Money supply. The money supply is often considered a leading indicator. Fall in money supply and an indicator of economic activity. However, in last recession, the money supply (both broad and narrow) was a lagging indicator.
After 2008 recession, the money supply didn’t fall immediately. It took until the start of 2009 for M4 growth to decline and the second half for M0 to fall.
It can be difficult to know the exact state of the economy. Certain leading indicators can often be a good guide to future trends. In particular, levels of consumer and business confidence are often a good guide to expectations. Then we see statistics, such as the purchase of capital goods and average weekly hours worked as an indicator of where the economy may be going.
Some indicators lag behind the rest of the economy. The traditional lagging indicator is the rate of unemployment. However, in recent years, unemployment has become more responsive to economic cycle – an indication it is easier to hire and fire workers.
Also, statistics we may expect to be leading or coincident (such as money supply) can be more unpredictable in practice, with last recession, money supply growth lagging behind changes in real GDP.