Leading vs. Lagging vs. Coincident Indicators: What’s the Difference?
Investors and policymakers always want tools to predict future trends and make informed decisions. Among these tools, economic indicators stand out as crucial signposts, offering insights into the health and direction of an economy. Leading, lagging, and coincident indicators form a trifecta of economic measures, each playing a role in forecasting, confirming, or telling us about the market or the broader economy.
Indicators fall into one of three categories:
- Leading indicators point toward future events.
- Lagging indicators are used to confirm economic or market shifts already in motion.
- Coincident indicators occur in real time and clarify the state of the economy.
Key Takeaways
- An indicator is a statistic that predicts and understands financial or economic trends.
- All indicators fall into one of three categories: Leading indicators, lagging indicators, and coincident indicators.
- Leading indicators point toward possible future events.
- Lagging indicators are used to confirm a pattern in progress.
- Coincident indicators occur in real time and help clarify the state of the economy.
What Are Indicators?
An indicator is a statistic used to predict and understand financial or economic trends.
Some indicators seem lighthearted but, in the end, have a certain validity. The lipstick indicator was invented by Leonard Lauder, chair of the Estee Lauder cosmetic company. He claimed that rising sales of lipstick are an indicator of troubled times. And he was right.1
However, the most closely watched indicators are social, business, and economic statistics published by respected sources, including various departments of the U.S. government. All are based on surveys that are conducted regularly, usually once a month, allowing the results to be tracked and analyzed over time.
The information provided by these indicators is very influential. Indicators help shape fiscal and monetary policy, business investments and strategies, and the value of share prices.
Leading Indicators
Leading indicators are economic statistics that often anticipate trends, providing a means of forecasting economic activity. These indicators typically change before the broader economy shifts, thus “leading” or in front of them. Here are some key examples:
Yield Curves
These plot the interest rates of bonds with equal credit quality but different maturity dates. The shape of a yield curve can provide crucial information about future economic conditions:
- A normal, upward-sloping curve often suggests economic expansion.
- An inverted curve, where short-term rates exceed long-term rates, has historically preceded recessions.
However, as you can see below, negative yield curves recently have not borne that out in the 2020s (yet).
New Housing Starts
When housing starts rise, this means builders are optimistic about demand in the near future for newly constructed homes. When they fall, builders are cautious since they’re worried about building homes that can’t be sold. Hence, housing starts are seen as a sign that home sales are slowing—or at least that builders fear they will be.
Purchasing Managers’ Index (PMI)
The PMI measures the health of the manufacturing and service sectors based on surveys of private-sector companies:
- A score above 50 indicates expansion.
- A score below 50 suggests contraction.2
Money Supply
The overall amount of money circulating in an economy can signal future economic strength:
- Increases in the money supply often correlates with economic growth.
- Reductions in the money supply could indicate a potential economic slowdown.
These indicators, when analyzed collectively, can provide a more comprehensive view of potential economic directions. However, it’s important to note that no single indicator is infallible. Indeed, there are arguments among experts over just how much we should trust each of these indicators, alone or with others.
Lagging Indicators
Lagging indicators can only be known after the event, but that doesn’t make them useless. They confirm patterns—like suddenly having a GPS after struggling to find one’s way in foggy weather.
The unemployment rate is one of the more reliable lagging indicators. If the unemployment rate rose last month and the month before, the overall economy has slowed. Given that lower employment means less spending in the economy, this suggests that the slowdown will continue.
The consumer price index (CPI), which measures changes in the inflation rate, is another closely watched lagging indicator. There are few events that cause more economic ripple effects than price increases. In the 2020s, the U.S. Federal Reserve kept raising the fed funds rate to battle post-pandemic inflation. By 2024, that campaign seemed to have worked:
Coincident Indicators
Coincident indicators are data points that usually change simultaneously with general economic conditions and, as a result, are viewed as reflecting the present economy. While leading indicators look ahead and lagging indicators look behind, coincident indicators reflect the present, or very recent past.
All three types of indicators are used together to get a better, fuller sense of what is in store for the economy and the market.
Personal income is a coincident indicator of economic health. Higher personal income numbers coincide with a stronger economy. Lower personal income numbers mean the economy is struggling. The gross domestic product (GDP) of an economy is also a coincident indicator. Below is the real GDP for the U.S.—the GDP adjusted for inflation:
How Reliable Are Leading Indicators for Predicting Economic Shifts?
Their dependability varies. For instance, until the late 2010s, the yield curve had correctly signaled all nine recessions since 1955, with only one false positive. And yet, changes in the economy perhaps mean it’s no longer the signal it once was. The lesson is that the effectiveness of indicators changes over time because of structural economic shifts or policy changes.
A good way to check the indicators we’ve mentioned is to look at the first chart above (“Do Inverted Yield Curves Portend Recessions?”), which has in orange periods of recession. You can compare the other indicators against their ability to signal those turning points.
How Are Advances in Data Analytics Changing How Experts Use Economic Indicators?
Big data analytics and artificial intelligence are enabling the creation of new, more subtle indicators of economic shifts. For instance, satellite imagery is now used to estimate retail sales by counting cars in shopping mall parking lots.3 Social media sentiment analysis is being explored as a potential leading indicator of consumer behavior.4 These new data sources offer more frequent and granular insights than traditional monthly or quarterly reports. However, they also present challenges in terms of data quality, privacy concerns, and the need for new analytical frames to interpret them and test their reliability.
Do Global Events Change How We Read Economic Indicators?
Global events can significantly distort their usual power to tell us about the economic currents. For example, during the COVID-19 pandemic, many traditional indicators became less reliable because of economic disruptions and the inability to collect the necessary data. In that case, economists turned to high-frequency data like credit card spending or mobility reports for more real-time insights.5
The Bottom Line
Leading, lagging, and coincident indicators are part of a tool kit for understanding and forecasting economic trends. Leading indicators, such as yield curves, new housing starts, and the PMI, offer signs of future economic activity. These forward-looking metrics help investors and policymakers anticipate potential economic changes and react accordingly. Lagging indicators, like unemployment rates and corporate profits, confirm long-term trends but are slower to reflect changes, serving as a retrospective view of the recent economic past. Coincident indicators, including GDP and retail sales, move with the economy, providing a real-time snapshot of present conditions.
However, interpreting these indicators requires careful consideration of global events, structural economic changes, and evolving market dynamics. It’s also important to keep in mind that many indicators are signals but not direct readings of the economy, and experts often clash on how to read these signals in light of others arising from changes in the markets.
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