For investors, understanding the business cycle and the behavior of economic indicators is essential for making informed portfolio decisions. Economic indicators provide insight into where the economy is headed, helping investors anticipate periods of growth or contraction that can influence corporate earnings, interest rates, and market sentiment. The stock market itself often acts as a leading indicator, as share prices tend to incorporate expectations about future economic conditions well before they are reflected in traditional economic data. By monitoring leading, coincident, and lagging indicators, investors can better position their portfolios to capitalize on opportunities during expansionary phases and mitigate risk during potential downturns. Lets review the different types of economic indicators and examine where they stand now.
Leading Indicators: Predicting Economic Direction
Leading indicators provide early signals about where the economy is heading. They often change before the broader economy does, allowing businesses and policymakers to anticipate shifts in economic activity.
For example, auto sales are a classic leading indicator. When auto sales rise, it signals growing consumer confidence and willingness to spend on big-ticket items. Similarly, consumer credit trends can indicate optimism or caution in household spending. Increased borrowing often precedes stronger economic growth, as it reflects consumer confidence in future income. Housing starts, which indicate new residential construction, are often planned based on anticipated future economic conditions. When builders expect strong economic growth, rising employment, and stable consumer income, they increase construction, signaling optimism about the economys trajectory before broader economic expansion is fully visible in GDP or employment data.
The Manufacturing ISM Index is another leading indicator that measures the health of the manufacturing sector. A reading above 50 typically signals expansion, while below 50 suggests contraction. Since manufacturing orders and production decisions are made in anticipation of demand, this index often foreshadows broader economic trends.
Coincident Indicators: Measuring the Current Economy
Coincident indicators move in step with the economy, providing real-time insights into economic activity. Among the most widely followed are retail sales, industrial production, and the Services ISM Index.
Retail sales directly measure consumer spending, a key driver of the U.S. economy. Rising retail sales generally indicate that households are confident and actively participating in the economy. Industrial production, which tracks output in manufacturing, mining, and utilities, provides a snapshot of industrial sector performance. Similarly, the Services ISM Index reflects conditions in the services sector, which makes up a significant portion of economic activity. When these indicators are strong, they signal that the economy is currently in an expansion phase.
Lagging Indicators: Confirming Trends
Lagging indicators change after the economy has already begun moving in a certain direction. They serve to confirm trends rather than predict them. Unemployment is a classic example. Companies typically adjust their workforce only after they have experienced changes in demand, making shifts in unemployment a confirmation of economic expansion or contraction.
Other lagging indicators include the Consumer Price Index (CPI), which tracks inflation. Prices typically rise or fall in response to past economic activitysuch as increased consumer spending, higher wages, or supply constraintsso CPI confirms trends rather than predicts them.
Current Economic Indicators as of August 2025
Examining the most recent economic data helps contextualize where the U.S. economy is in the business cycle. As of August 2025, several key indicators suggest that the economy is in a period of expansion. Lets break these down as I do in my weekly wrap-ups.
Auto Sales:The most recent data shows vehicle sales rose to a seasonally adjusted pace of 16.4 million units, a 7.1% increase from the previous month rebounding from Junes sales slump.This ones tricky. The pace is down 6.6% on an unadjusted basis from July of 2024; however, light-truck sales were up 7.1% year-over-year, accounting for 84% of total sales, while passenger vehicle sales fell 11.5% year-over-year. The trend has been volatile due to a spike in sales in early 2025 as consumers rushed to get ahead of tariffs, which led to a decline once those tariffs were announced. Theres a rebound here in July, but the unadjusted sales were still lower. This will be an indicator to watch in the months ahead. Given how much light-truck sales account for total sales, Im going to argue this is in an expansionary mode.
Consumer Credit:In June 2025, consumer credit increased by $7.4 billion following an unrevised $5.1 billion increase in May, driven mainly by nonrevolving credit (like mortgages, auto loans, student loans, and personal loans). The annual rate for June was an increase of 1.8%. This reflects a moderate growth in consumer borrowing.
Durable Goods Orders:In July 2025, durable goods decreased by 2.8%, which was less than analysts expected. Nondefense capital goods orders excluding aircraft was up 1.1% as a proxy for business investment. As a leading indicator, durable goods orders provide insight into future manufacturing activity and capital spending trends, and the current increase suggests a moderate expansion in the manufacturing sector.
Manufacturing ISM Index:The ISM Manufacturing Index stood at 49.8 in July 2025 up slightly from Junes 49 reading, indicating contraction in the manufacturing sector as it fell below the neutral 50 mark. This marks the fifth consecutive month of contraction, suggesting challenges in manufacturing activity. While the score is near 50 or flat, given the fifth consecutive month of contraction, Ill call this one contracting.
Retail Sales:Retail sales in July 2025 rose by 0.5% from the previous month, following an upwardly revised 0.9% increase in June. This indicates steady consumer spending, though the pace of growth has slightly moderated.
Industrial Production:Industrial production edged down by 0.1% in July 2025, with manufacturing output unchanged, mining declining by 0.4%, and utilities decreasing by 0.2%. This suggests a slight slowdown in industrial activity but is still up 1.4% year over year with a capacity utilization rate of 77.5%, which is slightly below average.
Services ISM Index:The ISM Services Index registered at 50.1% in July 2025, indicating marginal expansion in the services sector. While above the neutral 50 mark, the slight decline from June suggests a deceleration in services activity.
Unemployment Rate:The unemployment rate remained steady at 4.2% in July 2025, unchanged from the previous month and near historically low levels. This stability indicates a relatively balanced labor market typical of an economic expansion.
Consumer Price Index (CPI):The July CPI increased by 2.7% over the last 12 months, with a 0.2% rise on a month-over-month basis. Core CPI, without food and energy, was up 0.3% month-over-month with the annual rate up 3.1%. This reflects moderate inflationary pressures within the economy, but the market responded favorably on the day of release with the notion the Fed could resume lower rates at the September meeting. Economists believe the reaction was overdone given the increase in the core CPI annual rate over the previous month. The CPI is a lagging indicator given it usually changes as a result of the economy having already passed through one business cycle.
Housing Starts:July housing starts were much better than expected, up 1.428 million vs 1.358 million prior, revised higher. Trends in previous months suggest a steady pace of new residential construction, indicating confidence in the housing market.
With seven of these indicators in expansion territory, two in contraction, and one as neutral, its safe to say economic conditions are in the expansion phase.
Interpreting the Data
Taken together, the current readings suggest that the U.S. economy is in an expansionary phase. Leading indicators point to continued confidence and spending, coincident indicators confirm active economic participation, and lagging indicators signal that the expansion is well underway.
The durable goods, manufacturing ISM, and the rising consumer price index are likely more tied to the volatile political environment around trade and tariffs. When consumers expect prices to rise in the future, they often accelerate purchases to buy goods at the current lower price, effectivelypulling demand forward. Once the price increase occurs and these advance purchases are satisfied, overall demand temporarilydrops, creating a short-term slowdown in consumption.
Expanding credit has been a good sign as well as the increase in housing starts. If the Federal Reserve reduces rates in September and again later this year, that could help with some of the affordability issues found in the housing market with high prices and high mortgage rates. The stock market is another leading indicator of sorts and prices are near all-time highs with participation across the board from the SP 500, Dow Industrials, Nasdaq, and finally the Russell 2000 which I highlighted in last weeks chart of the week.
Conclusion
I believe in following the business cycle and using it to determine whether to overweight stocks versus bonds for my clients on 3 to 4-year cycles. Understanding the business cycle is essential for navigating economic fluctuations. Leading, coincident, and lagging indicators each provide unique insights into past, present, and future economic conditions. As of August 2025, the U.S. economy is displaying the hallmarks of expansion, supported by strong consumer activity and credit utilization, industrial growth, and overall confidence in the market. On the flip side, flat and contracting services and manufacturing activity is a concern, but likely to help with inflation pressures. Continued attention to these indicators will be critical in anticipating turning points in the cycle and making informed financial and policy decisions.
