Loading the player...

What is a 'Leading Indicator'

A leading indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but they are not always accurate. Bond yields are a good leading indicator of the market, because investors can use them to anticipate and speculate on trends in the economy.

BREAKING DOWN 'Leading Indicator'

Leading indicators are used to gain some sense of which way the economy is headed. Investors use them to adjust their strategy to benefit from future market conditions. Federal policymakers use them for considering adjustments to monetary policy. Businesses use them to anticipate economic conditions that will affect their revenue. In practice, leading indicators are not always accurate predictors of the future. However, when used in concert with other data, they can reveal certain trends which support the probability of changing conditions.

Leading Indicators for the Economy

There are a number of leading indicators used in economic forecasting. Most of these indicators are based on aggregate data gathered from accredited sources focusing on specific aspects of the economy. The Durable Goods Report (DGR), which is developed from a monthly survey of heavy manufacturers, is used as a barometer for the health of the durable goods sector. The Purchasing Managers Index (PMI) is another survey-based indicator watched closely by economists in predicting growth in gross domestic product (GDP).

One of the more accurate leading indicators is the Consumer Confidence Index, which surveys consumers about their perceptions and attitudes. A rise or fall of the index is a strong indication of the future level of consumer spending, which accounts for 70% of the economy.

Leading Indicators for Investors

Investors watch many of the same leading indicators as economists, because the health of the economy directly impacts the direction of the stock market. However, investors tend to track indicators that can more directly influence the stock market. For example, the number of jobless claims, which is reported weekly by the U.S. Department of Labor, provides a timely look at the health of the economy. When jobless claims rise, it is a sign of a weakening economy. When they fall, it is an indication that companies are more confident about their prospects for growth.

Leading Indicators for Businesses

Successful businesses do an excellent job of tracking their bottom line and their balance sheet, but the data used for those reports are lagging indicators that may have no bearing on the future. One of the most effective leading indicators for businesses is the measure of customer satisfaction. For example, an increase in customer complaints can be indicator of problems in production or distribution, which, if detected early, could prevent the loss of market share.

RELATED TERMS
  1. Indicator

    Indicators are statistics used to measure current conditions ...
  2. Economic Indicator

    An economic indicator is a piece of economic data, usually of ...
  3. Lagging Indicator

    1. A measurable economic factor that changes after the economy ...
  4. Coincident Indicator

    A metric which shows the current state of economic activity within ...
  5. Hybrid Indicator

    A technical indicator that combines core elements of chart analysis ...
  6. Economic Conditions

    The state of the economy in a country or region. Economic conditions ...
Related Articles
  1. Insights

    What is a Leading Indicator?

    A leading indicator is a measurable economic factor that tends to change right before the economy starts to change.
  2. Investing

    Leading Economic Indicators Predict Market Trends

    Leading indicators help investors to predict and react to where the market is headed.
  3. Trading

    Trading Around Key Options Indicators

    Learn the key economic indicators to help predict market movement.
  4. Trading

    4 Key Indicators That Move The Markets

    Find out what reports to watch in order to anticipate and react to market movements.
  5. Investing

    Economic Indicators That Do-It-Yourself Investors Should Know

    Understanding these investing tools will put the market in your hands.
  6. Insights

    Leading Economic Indicators Predict Market Trends

    Leading economic indicators show where the economy is headed. While there are many available, each one has flaws, so they must be considered together.
  7. Trading

    The Fundamentals Of Forex Fundamentals

    Charting is not the only way to analyze the foreign-exchange market. Learn how to apply fundamental analysis to the economic indicators.
  8. Trading

    What is an Indicator?

    Investors use indicators to measure economic conditions and forecast financial and economic trends.
  9. Investing

    Market Bottom: Are We There Yet?

    No one rings a bell when the bear market's over, but that doesn't mean there's no way to predict a bottom.
RELATED FAQS
  1. What are leading, lagging and coincident indicators? What are they for?

    An indicator is anything that can be used to predict future financial or economic trends. For example, the social and economic ... Read Answer >>
  2. What is the difference between market indicators and economic indicators?

    Read about the differences between technical market indicators and general economic indicators, and learn how traders and ... Read Answer >>
  3. How can consumer durables act as economic indicators?

    Learn how consumer durables act as economic indicators. Consumer durables are products with life spans of at least three ... Read Answer >>
  4. What are the most common market indicators to follow the U.S stock market and economy?

    Understand some of the key indicators analysts use to follow the U.S. stock markets and to assess the overall condition of ... Read Answer >>
  5. How do I invest or trade market indicators?

    Read about how investors can trade actual market indicators, such as the S&P 500 Index, rather than specific stocks or commodities. Read Answer >>
  6. How should an investor interpret the consumer and business confidence index when ...

    Learn how investors benefit from watching the consumer and business confidence indexes, along with other key metrics, when ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center