Leading Indicators in the US

We can identify several leading indicators in the United States, but first let us consider our alternatives.

There are 3 types of indicators; leading (future), coincident (present) and lagging (past).

Therefore, we can expect to use leading indicators to predict the economic trend, while using coincident indicators as a confirmation tool and lagging indicators usually change after the economy.

The makeup of an economy

The economy is formed by two parts; businesses and consumers. The business classification is subcategorised into: Manufacturing and Services. Within both subcategories, there are only 2 types of manufacturing or services businesses; cyclical or defensive.

The Institute for Supply Management (ISM) releases its Purchasing Managers Index (PMI) on the first business day each month. You can check on their website.

The ISM Business Survey Committee (BSC) is responsible to identify index changes, if any. By using 300 Manufacturing companies to relate to their business activities and filling out a questionnaire.

We are here thereof speaking of an index that contributes 20% of US Gross Domestic Product: ISM Manufacturing ROB / PMI.

New Orders20%

We can use these tools to predict the direction of the US Economy in six to twelve months.

From December 2020 – ISM Report on Business PMI:

IndexSeries Index DecSeries Index NovPercentage Point ChangeDirectionRate of ChangeTrend* (Months)
Manufacturing PMI®60.757.5+3.2GrowingFaster7
New Orders67.965.1+2.8GrowingFaster7
Employment51.548.4+3.1GrowingFrom Contracting1
Supplier Deliveries67.661.7+5.9SlowingFaster14
Customers’ Inventories37.936.3+1.6Too LowSlower51
Backlog of Orders59.156.9+2.2GrowingFaster6
New Export Orders57.557.8-0.3GrowingSlower6
Manufacturing SectorGrowingFaster7

Numbers are expressed in percentages (%). Above 50 means there is growth, meanwhile below 50 means contraction. Also, it can grow at a faster or slower pace and the same applies to contracting periods.

The ISM is used by Washington and the FED to decide economic policy.

Non – Manufacturing Report on Business NMI – Services Index

Also known as the Services PMI, represents 80% of the US economy.

The makeup of the Non Manufacturing Index (NMI)

Business Activity25%
New Orders25%

The Business Activity Index itself is often viewed as a leading indicator of the Non Manufacturing Index (NMI).

The University of Michigan Consumer Sentiment Index (UMCSI)

The US consumer makes two thirds of the overall spending in the US market. This is why the consumer sentiment is a key indicator to understanding the spending perspectives into the near future.

Spending more money means a growing economy, while spending less is usually associated with a contraction in the economy.

Expectations Index50%
Current Conditions Index50%
University of Michigan CSI100%

The Census Bureau’s Monthly Report on Building Permits

This indicator allows us to understand the housing sector in the US market, which makes up about a large percentage of US GDP.

You can find this information at the website from the United States Census Bureau.

Building Permit Authorised -> Housing Start -> Housing Completion

Building Permit Definition: The residential building has qualified and obtained permission by the local state planning department.

Housing Start Definition: The foundations of the residential building have been set. The project has ‘’started’’.

Housing Completion Definition: The structure and major work has been completed. The home is offered for sale.

Other indicators of importance in the US

  1. The Employment Situation Report – Non-farm payrolls and the Unemployment rate.
  2. US durable goods and shipments report.
  3. Industrial Production.

Total non-farm payrolls represent approximately 80 percent of the US workforce that produce GDP.

You can find more information on the employment situation by clicking here.

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