Let's Break It Down - Leading vs. Lagging Indicators

Introduction

Economists try to figure out where the economy is heading, much like weather forecasters predict storms. To do this, they use different types of data called economic indicators. Some signal what is coming, while others confirm what already happened.

Leading Indicators

Leading indicators tend to change before the economy as a whole changes. Examples include stock prices, new building permits, consumer confidence, and new orders for factory goods. If building permits drop sharply, it might signal that the economy will slow in the coming months.

Lagging Indicators

Lagging indicators change after the economy has already shifted. The unemployment rate is a classic example, since companies often wait to hire or lay off workers until they are sure about the economy's direction. Corporate profits and some inflation measures can also lag.

Coincident Indicators

Some indicators, like GDP, industrial production, and personal income, move at the same time as the economy. Economists combine all three types to get a clearer picture. The Conference Board publishes a well-known Leading Economic Index that combines several leading indicators.

Conclusion

Leading and lagging indicators help economists and investors understand the economy's past, present, and future. They are like the dashboard of the economic car!