How to Interpret The Facts and Data on Facts First

As the name of our website suggests, we put facts first and leave it up to our readers to form their own opinion based on the facts we present. The same piece of data can lead to multiple conclusions which are influenced by the amount of context you have, any political leanings and preconceived notions among many others.

Our hope with this article is to help our readers think about different ways to interpret the data found on Facts First. 

For any metric we track, there are a number of factors that influence it and what it means. We want to share a few of these with you. Let us know if you can think of any other factors or metrics we didn’t include here.

Is An Indicator Lagging or Leading?

It’s important to be aware of whether the indicator you are looking is leading or lagging. A lagging indicator shows the results of actions over a long period of time i.e. six months or a year.

A leading indicator tells you about performance or expectations right now, or in the very recent past. It also gives you an idea of how the economy might look in the near future or at least how markets expect the economy to perform.

Lagging indicators have more time and events behind them so they change more slowly, like trying to turn a big ship in the ocean, while leading indicators can change more suddenly because they are moved by more recent events.

A lagging indicator is useful for confirming a trend shift has actually happened and because there’s more time to the factors behind a lagging indicator it’s more stable. Lagging indicators generally only have a shift after a major change has already taken place.

A leading indicator, by contrast is volatile, and could indicate the beginning of a trend shift, but cannot be used alone to confirm one.

So what are some examples of lagging and leading indicators?

Gross domestic product (GDP) and the employment rate are lagging indicators. It takes more time for changes in the economy and public policy to have an effect on what these indicators measure and push their numbers up or down.

For example, the Federal Reserve started buying hundreds of billions of dollars worth of “toxic mortgages” in November 2008 to get the economy out of the financial crisis. By March 2009 it had purchased a trillion dollars worth of subprime mortgages, bank debt, and Treasury notes. 

That number doubled to two trillion by June 2009. And President Obama secured passage of a nearly one trillion dollar spending package in February 2009. It still wasn’t until the fourth quarter of 2009 that the economy pulled out of the recession (as measured by GDP).

On the other hand, stock prices and bond yields (the amount of interest paid to bondholders) are leading indicators. They react to new information quickly and swing up and down more suddenly than GDP or employment. You see that when a new product announcement or earnings report pushes up a stock’s value overnight. Or when even a tweet from the president can cause the entire stock market to rise or fall over just a few hours.

Here is a table of indicators we are currently tracking and those we are planning to measure in the future, and whether they are leading or lagging indicators.

Currently Tracking

  • Stock market performance (leading)
  • GDP growth (lagging)
  • Jobs created (lagging)

In The Works

  • Trade deficit (lagging)
  • Total debt (lagging)
  • Hourly wages (lagging)
  • Inflation (lagging)
  • Federal Deficit (leading)
  • Unemployment rate (lagging)

Timing When Presidents Take Office

The existing economy and situation when a president takes office could factor into their performance. That means GDP, employment and stock market performance during a president’s time in office can be largely affected by the policies of the previous administration, especially in the first few months and quarters of their time (GDP and employment more so since it is a lagging indicator). It can also be affected by major non-presidential events that happened before they took office.

A recent example is the economy inherited by Obama. President Barack Obama took office in January 2009, a little over a year after the subprime mortgage crisis crashed the stock market and caused a credit crunch that led to the Great Recession. 

Was the market at a low point already and bound to recover, or did Obama’s actions in office help with the recovery?

Major Events That Affect Markets

From time to time there are also major events that have a serious and lasting impact on GDP, jobs growth, stock market valuations, federal spending, interest rates, and inflation.

The World Trade Center and Pentagon attacks on September 11, 2001 when George W. Bush was president is the starkest example in living memory. After the markets opened after 9/11, the S&P 500 was down almost 12% in a week and continued to decrease over the next five quarters. It wasn’t until March 2003 that stocks entered a bull market again, lasting until the fourth quarter of 2007.

Before the 9/11 attacks, the US government was expected to continue the Clinton surpluses, and amass a trillion dollar surplus over the next ten years. Instead it ended up running a multi-trillion dollar deficit over that time to bolster the economy and fight the War on Terror.

Presidential Actions

The President of the United States can have an enormous influence on stock market performance. For instance, the president nominates the chair of the Federal Reserve, the central bank of the US and world economy.

The Fed is a politically independent organization that moves vast amounts of money through the financial system with two main goals: Keeping prices stable and keeping unemployment low. But its actions have leading and lagging effects on stocks.

President Donald Trump criticized Fed policy during a series of interest rate increases over the first half of his presidency, arguing that it would worsen the trade deficit with China and other trading partners. To address this concern himself, he signed executive orders placing tariffs on hundreds of billions of dollars worth of imports. The Trump “trade war” has had significant effects on stock prices, the trade balance, and fiscal outlays.

Presidents also play a central role in shaping the federal budget each year, which is called fiscal policy. How much the government spends and how it spends it can have major lagging effects on interest rates, bond yields, inflation, employment, and stock market performance.

When the government spends more, it pumps more money into the economy. That increases economic activity and stimulates demand for more goods and services. This increases corporate profits and stock prices.

An example is President Franklin D. Roosevelt’s increased domestic and military spending, which is credited in creating the wartime recovery from the Great Depression.

Congressional Actions

Under the Constitution, Congress is an equal partner with the president in setting economic policies. Each has checks and balances on the other. While the president nominates the Fed Chair, the Senate must approve the nomination. While the president is very influential in setting budgets, Congress must ultimately agree to pass them.

Congress can also pass spending bills without the president’s support if it has enough votes to override his veto. That happened in 1982 when the Democratically-controlled House and Republican-controlled Senate had enough votes to override President Ronald Reagan’s veto of a $14 billion supplementary spending bill. 

Congressional passage of the American Recovery and Reinvestment Act of 2009 in February of that year boosted federal deficit spending by nearly a trillion dollars. By year’s end the GDP recession was over. Increased deficit spending by Congress after 9/11 also pulled the economy out of recession.

The Gramm-Leach-Bliley Act (1999) significantly deregulated the financial industry. It may have had a role to play in the economic expansion starting in 2003, but it also may have had a role to play in the subsequent crash of 2007 and 2008.

When the Republican controlled Congress passed the Personal Responsibility and Work Opportunity Act (with President Bill Clinton’s signature) in 1996, the unemployment rate had already been steadily falling for four years. But by 2000, unemployment reached lows unseen since before the 1970 recession.