Key Risk Indicators (KRIs), also known as Early Warning Indicators (EWIs), tell you that something might be about to happen. It is important to get the right indicator and to set the warning level correctly – the point at which it raises the alarm.
When a deer licks its snout, it means that it is on the alert, there may be a predator nearby; moistening its nostrils heightens its sense of smell. When a hippo yawns, it does not indicate that it is tired, it means it is about to attack; if you are standing in front of it at that moment, you might want to run.
In finance, the inverted yield curve has regularly and accurately predicted the onset of recession. The inverted yield curve is when you have invested in government bonds and the short-term bonds (e.g. 3-month bonds) are paying higher interest than the long-term bonds (e.g. 10-year bonds) – it is normally the other way round. The inverted yield curve is happening at the moment in USA although the Federal Reserve claims that that is not what it indicates, just as the Federal Reserve claimed before the last three recessions.
It is important to understand indicators. A counter-indicator for the American economy is the level of profit of Home Depot, the U.S. home improvement retailer, which has just announced a rise in quarterly profits. However you could say that this is a lagging indicator – the economy has been good – rather than a lead indicator of what is about to happen.
Sources: “Wild Signs and Star Paths” – Tristan Gooley; the Economist magazine.