Economic indicators are designed to give insight into the current state of the economy and where economic growth is headed. They are compiled by the government or by independent organizations, and examples include the Consumer Price Index, Non Farm Payrolls, and the Beige Book. Economic indicators can be categorized as leading, lagging or coincident, according to how the indicator is looked at by the investing public.
Leading indicators give insight into where the growth of the economy is heading in the future. A good example of a leading indicator is the report on building permits. A building permit is generally requested 9 months before a house is completed. This makes building permits a good forecaster of the housing market. As the housing market is such a large part of the economy, this makes building permits a good leading indicator of the overall economy as well.
Lagging indicators give insight into how economic growth has been in the recent past. Unemployment is a good example of a lagging indicator. Normally the rate of unemployment rises after economic growth has started to slow, and not before.
Coincident indicators give insight into the current rate of economic growth. Once a quarter the US Department of Commerce releases the Gross Domestic Product number, which puts a dollar value on all the economic activity in the US economy for the last three months. This is a good example of a coincident indicator, as GDP is by definition the current measure of economic growth.
Most economic indicators are released to the public according to a precise schedule; for example, 2 pm on the first Tuesday of each month. At or close to the time of release of many economic indicators, the market can be very volatile (large swings in prices). Investors may not get the deal they thought they would get because a slight delay in executing an investor’s order can mean a significant change in price. Unless you have a good reason for wanting to make your investments at exactly that time, avoiding the times when news breaks on economic indicators is recommended.
For an overview of the economic indicators investors pay the most attention to go here.