Level 1 CFA® Exam:
Economic Indicators - Intro for Level 1 CFA Candidatesstar content check off when done
In this lesson, we will discuss economic indicators.
Economic indicators help us evaluate the state of the economy. We can assess the current, past, and future state of the economy, that is why we can distinguish between 3 groups of economic indicators. These are:
- leading indicators,
- lagging indicators, and
- coincident indicators.
Leading indicators are used to predict an economy’s future state.
Lagging indicators help us analyze the past condition of an economy.
Coincident indicators show us the current activity of an economy, such as the dynamics of industrial production.
You should know that the number of economic indicators is huge and differs for different countries. What is more very often indicators from a given group are aggregated into one composite indicator. For example, in the USA we have:
- the Index of Leading Economic Indicators that consists of 10 leading indicators,
- the Index of Lagging Economic Indicators that consists of 7 lagging indicators, and
- the Index of Coincidence Economic Indicators that consists of 4 coincidence indicators.
All these 3 composite indicators are provided by the organization called the Conference Board which includes over 1000 corporations and organizations from all over the world.
Now, what is the motivation for creating a composite indicator? First of all, it is easier to follow one composite indicator, than for example 10 single indicators. Secondly, it can be misleading to use only a few indicators. And thirdly, not all indicators carry the same weight. That is why it is important to know the aggregate result of a given group of indicators.
CFA Exam: Leading Indicatorsstar content check off when done
Let’s enumerate 10 leading indicators that are contained in the Index of Leading Economic Indicators in the United States. These are:
CFA Exam: Lagging Indicatorsstar content check off when done
Let’s have a look at 7 lagging indicators that are contained in the Index of Lagging Economic Indicators in the US. These are:
CFA Exam: Coincidence Indicatorsstar content check off when done
Let’s also say about 4 coincidence indicators that are contained in the Index of Coincidence Economic Indicators in the US. This index includes:
- Employees on nonagricultural payrolls,
- Personal income less transfer payments,
- Industrial production, and,
- Manufacturing and trade sales.
Level 1 CFA Exam Takeaways: Economic Indicatorsstar content check off when done
- We use economic indicators to describe the state of the economy.
- We use leading indicators to predict the future and lagging indicators to describe the past.
- If we are interested in the current state of the economy, we use coincidence indicators.