Lesson 5 of 6 · 15 min
Leading, coincident and lagging indicators
Economic indicators are grouped by whether their turning points come before, with or after the economy's, and reading the three groups together, often through composite indexes, tells an analyst where the cycle is and where it is heading.
In short
- Leading indicators turn before the economy (useful to predict the near term). Coincident turn with it (show the present). Lagging turn after it (confirm what happened).
- Leading examples: stock prices, building permits, average weekly hours in manufacturing, initial jobless claims, new orders, consumer expectations, the long–short interest rate spread.
- Coincident: industrial production, real personal income, manufacturing and trade sales, non-farm payrolls.
- Lagging: average duration of unemployment, inventory-sales ratio, change in unit labour costs, services inflation, average prime lending rate, consumer instalment debt to income, commercial and industrial loans outstanding.
- Composite indexes combine several indicators: The Conference Board LEI (10 US components, classical cycle) and the OECD CLI (consistent across about 30 countries, growth cycle).
- Classifications are empirical: based on observed history, they differ across economies and evolve over time. No single indicator is decisive.
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