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Types of economic indicators: Leading, lagging and Coincident

Economic indicators are periodical releases by the government and private organizations that lay out the health of a country's economy. Because of the insights they contained that enable investors to predict future economic trends, economic indicators are instrumental in influencing the country's currency values. One can find information on economic indicators such as unemployment rates, production figures and GDP growth on a quarterly, monthly, or even on a daily basis.

There are 3 categories of economic indicators that can be used to analyze the foreign exchange market's direction, each with their own significance. Economic indicators involves a broad spectrum and they can be classified as:

  • Leading economic indicator
  • Coincident economic indicator
  • Lagging economic indicator

It is difficult to rank which types of indicators have the most weight in foretelling the course of the economy, and subsequenty, its impact on currency market. With that said, leading economic indicators have been showing reliable foresights in the past to help investors make crucial investment decisions.

Leading economic indicators are major key markers that shift in advance ahead of the economy. Investorguide.com calls it "among the most closely watched pieces of news in the investment world" and they hit the bull's eye by pointing out "the Fed watches many of these indicators as it decides what to do about interest rates". A good example of a leading economic indicator is the stock market. A stock market provide an up-to-date data and is a direct reflection of a country's economy. Undoubtedly, the trend in stock market is parallel with the economy although there are nine other components of leading economic indicators to give a thorough idea of where the economy is heading.

Coincident economic indicators cover a wide range of data and is handy to determine business cycle. A coincident econimic indicator, as its name suggests, move at the same time as the economy. These can serve as a confirmation to business cycle turning points as far as forex investors are concerned.

Finally, lagging economic indicators are not so much as an 'indicator' as they usually prevail three to twelve month after the economy. Lagging economic indicators are the evidence to define the peaks and troughs that occurred, to be used in estimating the course of the next business cycle. Perhaps the most powerful lagging economic indicator is unemployment rate. Ken Little highlight the role of unemployment rate as a key lagging economic indicator in about.com, saying, "it shows whether companies anticipate things getting better or worse. If companies believe things are bad and getting worse, unemployment will rise. If they are more optimistic, then unemployment will fall."

To the trained eyes, economic indicators are fundamental tools for their investment interests. Although economic indicators can be false, they are never wrong. According to amosweb.com, "...leading indicators have actually predicted '12 of the last 9 contractions.' In other words, they predicted 3 contractions that never happened." However you look at it, that is still an awfully attractive track record by any investor's standard.