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Leading Indicator

Definition

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic indicators include various indices, earnings reports, and economic summaries: for example, the unemployment rate, quits rate, housing starts, consumer price index, consumer leverage ratio, industrial production, bankruptcies, gross domestic product, broadband internet penetration, retail sales, stock market prices, and money supply changes.

Leading Indicator

What is a 'Leading Indicator'

A leading indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but they are not always accurate. Bond yields are a good leading indicator of the market, because investors can use them to anticipate and speculate on trends in the economy.

Explaining 'Leading Indicator'

Leading indicators are used to gain some sense of which way the economy is headed. Investors use them to adjust their strategy to benefit from future market conditions. Federal policymakers use them for considering adjustments to monetary policy. Businesses use them to anticipate economic conditions that will affect their revenue. In practice, leading indicators are not always accurate predictors of the future. However, when used in concert with other data, they can reveal certain trends which support the probability of changing conditions.

Leading Indicators for the Economy

There are a number of leading indicators used in economic forecasting. Most of these indicators are based on aggregate data gathered from accredited sources focusing on specific aspects of the economy. The Durable Goods Report (DGR), which is developed from a monthly survey of heavy manufacturers, is used as a barometer for the health of the durable goods sector. The Purchasing Managers Index (PMI) is another survey-based indicator watched closely by economists in predicting growth in gross domestic product (GDP).

Leading Indicators for Investors

Investors watch many of the same leading indicators as economists, because the health of the economy directly impacts the direction of the stock market. However, investors tend to track indicators that can more directly influence the stock market. For example, the number of jobless claims, which is reported weekly by the U.S. Department of Labor, provides a timely look at the health of the economy. When jobless claims rise, it is a sign of a weakening economy. When they fall, it is an indication that companies are more confident about their prospects for growth.

Leading Indicators for Businesses

Successful businesses do an excellent job of tracking their bottom line and their balance sheet, but the data used for those reports are lagging indicators that may have no bearing on the future. One of the most effective leading indicators for businesses is the measure of customer satisfaction. For example, an increase in customer complaints can be indicator of problems in production or distribution, which, if detected early, could prevent the loss of market share.


Further Reading

The yield curve as a leading indicator: Some practical issuesThe yield curve as a leading indicator: Some practical issues
papers.ssrn.com [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

Stock prices as a leading indicator of the East Asian financial crisisStock prices as a leading indicator of the East Asian financial crisis
www.sciencedirect.com [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisisCan leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis
www.sciencedirect.com [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

Predicting US recessions: Financial variables as leading indicatorsPredicting US recessions: Financial variables as leading indicators
www.mitpressjournals.org [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

Is the stock market a leading indicator of economic activity in nigeria?Is the stock market a leading indicator of economic activity in nigeria?
www.econstor.eu [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

How did leading indicator forecasts perform during the 2001 recession?How did leading indicator forecasts perform during the 2001 recession?
papers.ssrn.com [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

The efficiency of intellectual capital investments as a potential leading indicatorThe efficiency of intellectual capital investments as a potential leading indicator
www.clutejournals.com [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …

The stock market as a leading indicator: An application of granger causalityThe stock market as a leading indicator: An application of granger causality
digitalcommons.iwu.edu [PDF]
Since the 1980s, economists have argued that the slope of the yield curve-the spread between long-and short-term interest rates-is a good predictor of future economic activity. While much of the existing research has documented how consistently movements in the …


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