3.6: Economic Forecasting

In the previous section, we introduced several measures that economists use to assess the performance of the economy at a given time. By looking at changes in the GDP, for instance, we can see whether the economy is growing. The CPI allows us to gauge inflation. These measures help us understand where the economy stands today. But what if we want to get a sense of where it’s headed in the future? To a certain extent, we can forecast future economic trends by analyzing several leading economic indicators.

Leading, Coincident and Lagging Economic Indicators

In economics, leading, lagging, and coincident indicators are tools used to analyze and predict economic performance. These indicators help economists, policymakers, and businesses make informed decisions about the state of the economy and potential future trends. An economic indicator is a statistic that provides valuable information about the economy. There’s no shortage of economic indicators, and trying to follow them all would be an overwhelming task. So, in this chapter, we will only discuss the general concept and a few of the key indicators.

The three main Canadian economic indicators are leading indicators, coincident indicators and lagging indicators.

Leading Indicators

Indicators that predict the status of the economy three to twelve months into the future are called leading economic indicators. If such an indicator rises, the economy is more likely to expand in the coming year. If it falls, the economy is more likely to contract. Leading indicators signal future economic activity and are used to predict changes in the economy before they occur. For example, stock prices often reflect investor sentiments about future economic conditions. An increase in building permits suggests future growth in the construction and housing markets. On the consumer confidence index, higher confidence indicates likely increases in spending, boosting economic activity. An increase in new orders for manufacturing indicates increased production and economic growth.  Businesses and policymakers monitor these changes to anticipate expansions or contractions in the economy.

New unemployment claims often reflect employers’ expectations about future economic conditions. If businesses anticipate a slowdown, they may lay off workers, leading to an increase in claims. This data provides an early signal of weakening economic activity or labour market challenges. Economists and policymakers monitor changes in unemployment claims to predict potential recessions or recoveries. For example, a sustained rise in claims could indicate an impending economic downturn, prompting proactive policy adjustments such as monetary easing or fiscal stimulus.

Lagging Indicators

These indicators reflect changes that have already occurred in the economy. They confirm trends but do not predict them. For example, changes in unemployment often lag behind economic trends as businesses adjust to economic shifts. Rising consumer debt levels confirm past high spending levels during an economic boom. The inflation rate typically reacts to earlier changes in supply, demand and monetary policy. These indicators are useful for validating the accuracy of leading indicators and understanding the economy’s historical performance.

The length of unemployment is also a lagging indicator. If unemployed workers have remained out of work for a long time, we may infer that the economy has been slow.

Coincident Indicators

These indicators move in real-time with the economy, reflecting its current state. Gross Domestic Product (GDP) directly shows the economic output at a given time. Employment levels indicate current labour market conditions. Retail sales reflect ongoing consumer spending trends. Industrial production measures real-time manufacturing activity. These indicators provide a snapshot of the present economic situation and are helpful for short-term planning.

Since employment is such a key goal in any economy, the Canadian Industry Statistics, in collaboration with Statistics Canada, tracks total non-farm payroll employment from which the number of net new jobs created can be determined. The number of new jobs created is considered a coincidental indicator in economics. New job creation reflects current economic activity and labour market conditions. It shows how businesses are responding to the existing economic climate by expanding their workforce, which aligns with the economy’s present state rather than predicting future trends. A rise in new jobs typically coincides with economic growth, indicating healthy consumer demand and business investment. Conversely, a decline in new jobs suggests slower economic activity or contraction.

Understanding the differences between these indicators is crucial:

• Businesses might use leading indicators to forecast demand and adjust production.
• Governments use lagging indicators to assess the effectiveness of policies.
• Both rely on coincident indicators for immediate economic health assessments.