Leading vs. Lagging vs. Coincident Indicators: What's the Difference?
Economists and investors are constantly watching for signs of what's immediately ahead for the markets and for the wider economy. The most closely watched of these signs are economic or business statistics that are tracked from month to month and therefore indicate a pattern. All indicators fall into one of three categories:
- Leading indicators are considered to point toward future events.
- Lagging indicators are seen as confirming a pattern that is in progress.
- Coincident indicators occur in real-time and clarify the state of the economy.
Key Takeaways
- An indicator can be any statistic that is used to predict and understand 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 may confirm a pattern that is in progress.
- Coincident indicators occur in real-time and help clarify the state of the economy.
What Are Indicators?
An indicator can be any statistic that is used to predict and understand financial or economic trends.
Some indicators that have been employed over the years seem lighthearted but, actually, 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.
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 fiscalandmonetary policy, business investments and strategies, and the value of share prices.
Leading Indicators
A leading indicator is a measurable set of data that might help to anticipate trends and forecast future economic activity.
Examples of leading indicators include:
- Yield curves: These lines that plot yields (interest rates) of bonds with equal credit quality but differing maturity dates, are viewed as a key indicator of the direction of the economy. The shape of the curve can indicate prospects for inflation, interest rates, and the state of the economy.
- New housing starts: If housing starts rise, it means builders are optimistic about the demand in the near future for newly constructed homes. If housing starts fall, builders are getting cautious. That's a sign that home sales are slowing, or at least that builders fear they soon will be.
- Purchasing Managers’ Index (PMI): Thepurchasing managers’ index (PMI) summarizeswhether business conditions, in the eyes of purchasing managers, are expanding, staying the same, or contracting.The number produced by the survey ranges from 0 to 100, with anything above 50 representing an improvement on the prior month.
- The overall money supply: Generally, if there is plenty of money out there, in consumers' pockets, in bank accounts, and in bank vaults ready to be invested in business expansion, it's a signal that the economy will be strong.
Lagging Indicators
Lagging indicators can only be known after the event, but that doesn't make them useless. They can clarify and confirm a pattern that is occurring over time.
The unemployment rate is one of the most reliable lagging indicators. If the unemployment rate rose last month and the month before, it indicates that the overall economy has been doing poorly and may well continue to do poorly.
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. Both the overall number and prices in key industries like fuel or medical costs are of interest.
All three types of indicators are used together to get a better, more complete sense of what is in store for the economy and investment markets.
Coincident Indicators
Coincident indicators are statistical indicators that usually change simultaneously with general economic conditions and, as a result, are viewed as reflecting the current state of the economy. While leading indicators look ahead and lagging indicators look behind, coincident indicators reflect the present, or very recent past.
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.
What are three examples of coincident indicators?
Coincident indicators show the contemporaneous state of economic activity within a particular area. Examples include GDP figures and data showing personal income and industrial production.
What are leading or lagging indicators?
Leading indicators look ahead and attempt to predict future outcomes, whereas lagging indicators look at the past. Some people fixate on leading indicators, arguing that what happened in the past is useless. However, that’s not true. Lagging indicators are very useful at confirming trends and changes in trends. And they are set in stone, unlike leading indicators, which may not always be accurate and can be misleading.
What are two examples of leading indicators?
Classic examples of leading indicators include yield curves, new housing starts, and the PMI. Each provide a gauge of where insiders and so-called experts think the economy is heading.
The Bottom Line
Investors, economists, central bankers, policymakers, and corporate executives all want to know the state of the economy and the direction it appears to be heading in. Money and the well-being of the population are on the line, making indicators, signals used to predict and understand financial or economic trends, widely analyzed and highly influential.
Indicators can be referred to as leading, lagging, or coincident. Leading indicators apply to the future, lagging indicators tend to move after changes in the economy have taken place and confirm patterns, and coincident indicators occur in real time and help clarify the state of the economy. All three types of indicators are used together to get a greater sense of what’s going on and what’s likely to happen next.
