7 Leading Economic Indicators Buy to Let Investors Should Know

Economies are notoriously unpredictable. A number of world-famous economists have spent years trying to find a formula that predicts the ebb and flow of financial markets. To date, not one has been successful. As an investor, that means it’s important to develop your own understanding of economies instead of believing the predictions you find in the headlines.

Understanding economic indicators allows you to base your investment decisions on educated estimations rather than taking pundits on faith. If some of the greatest economists in the world can’t figure it out, the mainstream tabloid press certainly doesn’t have a chance. Here are seven key leading economic indicators that help economists and investors gauge the economic landscape that lays ahead.

1. Manufacturing Activity

Manufacturing activity is an important leading indicator because it has a significant effect on the gross domestic product (GDP) of a country. It signals expected consumer demand, which, in turn, is an indicator of how much money people have to spend. High manufacturing activity usually means that employment levels are good, too. However, just because goods are being made, doesn’t necessarily mean they’re being sold.

Retail sales are arguably the other side of the same coin, and they also play a role in increasing GDP. If more goods are being produced, shops are busy and more employees are needed. This puts money back in people’s pockets and drives the economy in a positive direction. Retail sales metrics can become skewed if credit is handed out too easily and products are purchased with debt rather than people having more money to spend. If retail sales are low, but manufacturing activity is high, this can lead to high levels of inventory, another important indicator.

High inventory levels can mean one of two things. Either a period of significant economic activity is expected to take place sometime soon (as might be the case during Christmas), or sales have taken a nosedive against forecasted figures and shops are not doing well. The latter can also indicate that consumer confidence is down and people are holding onto their money instead of spending it on goods or services. This is usually seen as an ominous sign.

4. Building Permits Granted

Assessing the number of building permits granted in a area helps investors estimate the future supply of new housing stock. While this is a solid forecast of the strength of an economy, too much supply against limited demand can mean house prices will drop. Low house prices may be good or bad depending on which stage of an investment you’re at, but it’s often a sign of problems with the local economy. It’s also worth noting that there’s likely to be an 18-36 month lead time before the new inventory is on the market.

5. Housing Market Strength

A decline in the price of houses is usually caused by insufficient demand. This could be because of a property bubble that’s recently burst or the housing market is reaching the end of the cycle. Declining house prices are usually a bad thing for the local economy, but this indicator usually merits its own research. Because, much like the stock market, media hype tends to blow things out of reasonable perspective.

A decline in house prices means people’s wealth decreases, construction jobs are usually lost as the property development industry loses faith in the current economy. And all of these factors mean governments make less money in tax, a surefire contributor to financial struggle.

6. Level of New Business Start-ups

The number of start-ups in an economy is an important indicator for a number of reasons. Small businesses often create innovative products that contribute to GDP and create new jobs, putting money back in people’s pockets and creating tax money for the government.

An increase in small businesses can happen if lots of people are being laid off work due to an economic downturn. So just like the rest of these indicators, it’s important to use this metric in conjunction with other available information.

Following the financial crisis in 2008, there was a great deal of discussion about how many billions were wiped off the various stock exchanges in a matter of hours. The general health of stock exchanges is indeed a leading economic indicator. The present cost of any given stock is based largely on estimations and projections about how much money that company will make in the near future.

While this does have its value, it’s an inherent flaw to rely too heavily on this indicator. After all, they’re only estimations. And it’s in a company’s interest to paint a positive picture for shareholders or potential shareholders. Furthermore, the stock market is susceptible to manipulation through media hype. Traders purposefully inflate stock prices for their own ends, and the government intervenes via stimulus packages to help maintain a level of stability when really there is not one.