Headline unemployment has remained low, but slower wage growth and fewer job postings suggest softening labor conditions. Consumer expectations around inflation have spiked in recent months, but economic data hasn’t reflected any runaway inflation yet. A recent article in the NYT noted that “evidence for the economic impact of President Trump’s trade wars is everywhere – except, for the most part, in economic data itself.”[1]
The mixed signals that commonly arise when headlines report on economic data can often be more confusing the clarifying. Putting the various puzzle pieces together – both lagging indicators and leading indicators – and considering them as a larger picture can offer a more balanced view of where the economy stands and where it might be headed. For long-term investors, this can be a grounding exercise even if the overall strategy doesn’t change significantly.
Lagging Indicators: Looking Back
Lagging indicators are a key part of economic analysis. GDP growth, unemployment figures, and trade data are all based on standardized methodologies that offer historical context and a degree of objectivity. However, their timing can be a limitation. GDP data is released one month after each quarter and can be retroactively revised for the following three months as more data is incorporated. Similarly, unemployment numbers reflect decisions made by businesses weeks or months prior, and trade data offers a rearview look at where goods were shipped in the prior month.
Consumer spending is another indicator that is closely tracked and provides a snapshot of past data. Companies including McDonald’s and Chipotle have reported softening sales, while others such as Taco Bell and KFC have shown more resilience. These shifts were reported on recent earnings calls, but haven’t been fully reflected in broader economic data. This timing difference can lead to a disconnect between real-world observations and official economic reports.
Leading Indicators: Looking Ahead
In contrast, leading indicators attempt to predict future economic activity, however they are signals, not forecasts. These data points can include new building permits, manufacturing orders, or short-term movements in the stock market. They can be informative, but when interpreted in isolation or viewed as a guarantee of future results, they can be misleading.
One notoriously imperfect data point is consumer sentiment. This often falls sharply during periods of uncertainty, and it has fallen sharply recently, but actual spending behavior doesn’t always follow sentiment. During the pandemic in 2020, many economists anticipated steep declines in household spending based on negative sentiment. Instead, spending remained surprisingly resilient and provided a boost to stock prices.
Real-Time Data: Insightful or Distracting
When lagging indicators are too slow and leading ones too ambiguous, some analysts turn to alternative or “real-time” data. This approach can offer speed and granularity that’s harder to find in classic economic indicators. Examples include hotel bookings, airport traveler counts, credit card transactions, and freight shipments. During the pandemic, these metrics provided early insights into changing consumer behavior and business activity when traditional data lagged by months.
Still, these aren’t always clear. These data points may reflect genuine economic trends, but can also be noisy, unverified, and inconsistent. When a shipping company experiences declining volumes, it might be a harbinger of a broader economic slowdown, or it might be an anomaly for that company while competitors maintain stable demand. When airline travel numbers dip in the short-term, it can be impossible to know in real-time whether it’s due to a later-than-usual holiday or more lasting changes in consumer patterns.
Staying Grounded Through the Noise
Understanding the economy is not about finding a perfect number. It’s about evaluating patterns, context, and change over time, as well as recognizing that most alarmist headlines and snapshots of economic data are merely noise over the long-term.
For most long-term investment strategies, the delays and imperfections in this economic data are acceptable. Market cycles unfold over years, and a one-quarter dip in GDP or trade does not justify a dramatic shift in investment strategy. Our investment philosophy remains grounded in long-term goals, global diversification, and staying invested through full economic cycles. With this approach, our clients are better positioned to remain on track and confident in their financial security.
Resources
[1] Recession Warnings Are Everywhere, Except in the Data. New York Times
