An economic indicator is a basic tool used by analysts, investors, businesses and policy makers to evaluate the current and future health of an economy. These tools monitor and measure the state of the economy, providing an accurate picture of its current status. Economic indicators are useful in making decisions and analyzing market trends, allowing better long-term economic evaluations and forecasting.

Economic indicators can reveal underlying trends in consumer behaviour, employment, output, inflation and other economic variables that are useful for policy makers. Governments and businesses use economic indicators to predict changes in the market, craft sound strategies, develop effective policies and make informed decisions.

Leading indicators, lagging indicators, and coincident indicators are the three main types of economic indicators. Leading indicators are predictive numerical measurements that warn of the possibility of a future economic change. They tend to lead the business cycle, and include unemployment rate, new orders and consumer confidence. Lagging indicators are essentially past economic performance measures. They trail economic activities and report economic changes only after they have already happened. These economic indicators include durable goods, consumer expenditures and residential investments. Coincident indicators report economic circumstances as they are occurring. Examples include industrial production and consumers prices.

In general, economic indicators offer investors and businessman valuable data that can help inform decisions. They provide a much bigger picture of an economy—including where it’s been and where it’s going—than can be obtained from individual companies or the stock market. Using this “bigger picture” of the economy can help to reduce risks associated with investments and other financial decisions. Economic indicators, however, can be unreliable and inconsistent due to variations in data sources, data collections methods, definitions of variables, and other factors. Knowing how to track, interpret, and make use of economic indicators can help integrate using financial data with broader economic trends for better decision-making.