What is a leading indicator
A leading indicator is any economic factor that changes before the rest of the economy begins to go in a particular direction. Leading indicators help market observers and policy makers to predict significant changes in the economy.
Leading indicators are not always accurate. However, examining leading indicators in conjunction with other types of data can help provide information on the future health of an economy.
For example, many market players consider the yield curve, especially the spread between two-year rates and 10-year rates, a leading indicator. Indeed, the two-year yields higher than the 10-year yields are correlated both with the recession and the related market turmoil.
DISTRIBUTION Leading indicator
Leading indicators must be measurable to provide indications of the direction of the economy. Investors use these indicators to guide their investment strategies when anticipating future market conditions. Policy makers use them to define monetary policy. Businesses use them to make strategic decisions because they anticipate how future economic conditions may affect markets and incomes.
Leading indicators are often based on aggregated data collected from respected sources and focused on specific facets of the economy. For example, economists closely monitor the purchasing managers’ index (PMI) to forecast the growth of a country’s gross domestic product (GDP).
The Durable Goods Report (DGR) is based on a monthly survey of heavy manufacturers. It measures the health of the durable goods sector. Many people consider the Consumer Confidence Index (CCI) to be one of the most accurate leading indicators. This index questions consumers about their own perceptions and attitudes towards the economy.
Leading indicators for investors
Many investors pay attention to the same leading indicators as economists, but they tend to focus on indicators directly related to the stock market. An example of a leading indicator of interest to investors is the number of unemployment claims. The United States Department of Labor provides a weekly report on the number of jobless claims as an indicator of the health of the economy. An increase in unemployment claims indicates a weakening of the economy, which is likely to have a negative effect on the stock market. If jobless claims are decreasing, this may indicate that companies are growing, which is a good indication for the stock market.
Leading indicators for business
All companies track their own results and balance sheets, but the data in these reports is a lagging indicator. A company’s past performance does not necessarily indicate how it will behave in the future. Instead, companies view customer satisfaction as a fairly accurate indicator of future performance. For example, customer complaints or negative online reviews often indicate problems with production or service and, in some areas, may indicate a decline in future revenues.