Clues about the future. That is what leading indicators of the economy offer.
They are vital because they allow governments, companies and even families to foresee what is going to happen and act accordingly, according to the BBC.
An example: Until recently, a bottleneck in shipping has been indicating how the economy was reviving after the pandemic of COVID-19 and the confinements suffered.
After months of closure, businesses and consumers started shopping. Hence the need to ship goods from one side of the world to the other.
That global problem had a reading for economists: the recovery was too strong, almost too strong.
So much so that it caused a series of imbalances.
The advanced indexes are different from the more conventional data of an economy such as the Gross Domestic Product (GDP), which tells us how a country grew, the level of unemployment, or the inflation it suffers.
“The classic indicators refer to the past: GDP tells us how much an economy has grown in the last quarter or in the last year. But they are still a summary of what has already happened, ”explains Víctor Alvargonzález, of Nextep, an independent financial advisory service.
“But in economics it is very important to see what is going to happen and to know if it is possible to get ahead of yourself. And that’s where the leading indicators come in. They are key for investors and economists who have to plan and analyze the business cycle, “he adds.
Now, keep in mind that leading indicators may be in the thousands.
Each sector has its own.
There is, for example, an indicator that measures the number of people who enter shopping centers and that gives an idea of whether consumption is going to be strong or weak in a certain season.
Often times, operators of these store clusters place high-precision sensors on the doors that count the number of people entering and exiting.
“It is a very good indicator to anticipate what the commercial activity may be,” says Alvargonzález.
“And in the current economic environment, the demand for chips should be taken into account much more – now that everything is digital – than the demand for agricultural products,” he says.
However, although everything is measurable and quantifiable, and although statistics help to know in which direction a sector is moving, there are six particularly relevant indicators in all the economies of the world.
And they are showing signs of what is happening right now.
1. Consumer Confidence Index
Making a parallel, leading economic indicators try to guide seafarers so that they can come to fruition, explains Thor Vega, fixed income manager at the A&G firm.
“The Consumer Confidence Index is prepared by asking a large sample of individuals from all socioeconomic classes” about their current perception of the economy and its future expectations for the country, its family economy and employment.
The survey is carried out “in order to obtain data that reflects the purchases, sales, and level of confidence of those who will end up buying goods and services,” adds Vega.
If someone believes that they are going to lose their job, it is likely that their confidence in the economy is low and that instead of spending, they decide to save more for what can happen.
What you want to predict is the evolution of private consumption.
For example, private consumption represents two-thirds of the GDP of the United States.
And what is happening in the world?
Right now, the data indicates that globally there is a consumer appetite and that consumers are optimistic about the future.
“There are factors that keep the consumption outlook at very high levels. Household savings rates remain substantial at a time when the end of the year holidays and big promotional operations, such as Black Friday, are approaching, ”says Olivier de Berranger, director of asset management at La Financière de l’Echiquier.
Of course, analysts warn, it cannot be ruled out that the recent rise in covid-19 cases in certain countries and the measures taken have a negative impact on consumption.
2. PMI or activity indicators (manufacturing, purchasing, service sector)
They are the most managed and respected leading indicators in the markets.
They indicate what is happening in the private sector economy by monitoring the evolution of different variables such as production, new orders, employment and prices.
They are prepared by asking the executives of the most representative companies in a sector if they are buying more or fewer raw materials, for example, or if they are hiring more people or intend to do so.
If a company that manufactures screws is buying more aluminum, it means that it plans to produce more and therefore believes that its sales will grow.
“The PMI index for the euro zone was the first economic indicator that signaled the sharp drop in GDP during the global financial crisis at the end of 2008,” explain the experts at the analytics firm IHS Markit.
What are they saying?
For Aneeka Gupta, macroeconomic analyst at WisdomTree, there are two very powerful leads.
On the one hand, sales of chips – the basic components in smartphones, computers or household appliances – have recovered in recent months.
And on the other, he says, automakers have said they expect a rebound in production by the end of the year.
“All of this should support an improvement in the industrial sector leading again to a broader economic recovery,” Gupta explains.
3. The bags
They are a good leading indicator because when they rise they do so because investors think that companies are going to get better, they are going to have better results and greater profits.
On the contrary, if they fall they point to a scenario of an economy heading towards a recession or period of stagnation.
They are a good leading indicator of future economic activity.
What are they doing now?
“Global stocks led by the United States, Europe and Japan continue to record new all-time highs supported by a context of improving corporate earnings in the third quarter of 2021,” says the WisdomTree analyst.
In Europe, of the 92% of companies that reported third-quarter earnings, 68% have beaten the expectations.
And the same happens in the United States: of the 93% of the companies that have already published their results, 81.6% have exceeded the estimates.
4. Employment
What anticipates what will happen about employment are the records of the offers and the number of people who are looking for work.
They are figures that change before the situation of the labor panorama does.
“One of the reasons why there is concern about inflation right now is because a very unusual phenomenon has occurred in the United States: the supply of jobs was higher than the demand,” recalls Alvargonzález.
This means that, for the first time in a long time, US companies are having a hard time finding workers. And to attract them, wages are likely to rise, leading to price increases in the long run.
Workers, for their part, can afford to change jobs more easily.
What do these indicators point to?
“There is ample evidence that the US job market continues to recover,” says UBS GWM Chief Economist Paul Donovan.
5. Real estate market: construction permits and price of new homes
Building permits allow forecasting the levels of housing supply.
A high volume indicates that the construction industry will grow, which means more jobs and, therefore, the probability that the economy will grow.
“It is normal for the construction sector to use as advance data the price that is being paid per square meter on land that does not yet have a construction license or the number of pre-sales of current developments,” adds Thor Vega, the manager by A&G
And what is happening?
“The US housing market, for example, is showing signs of overheating,” says Ann-Katrin Petersen, a global economy analyst at Allianz GI, referring to a sector that is exploding.
These signals should be supported, among other data, by the sales of second-hand homes and the price of rent, which “is affecting consumer price inflation in the US,” he explains.
6. The key index of the transport sector
The Baltic Exchange Dry Index is another of the most important leading indicators, capable of forecasting the evolution of the world economy because its fluctuations reflect the supply and demand of important materials for factories.
It groups the cost of maritime freight transport of up to 23 key maritime routes of up to 600 shipping companies.
Above all, it provides a benchmark for the price of shipping for major raw materials such as coal or iron ore.
Members communicate directly with shipping agents to assess price levels for given shipping routes, a product to ship, and delivery time or speed.
What does it point to now?
The Baltic Exchange Dry Index peaked on October 7 and since then has dropped sharply, signaling that maritime traffic is returning to normal.
.
Ricardo is a renowned author and journalist, known for his exceptional writing on top-news stories. He currently works as a writer at the 247 News Agency, where he is known for his ability to deliver breaking news and insightful analysis on the most pressing issues of the day.
