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 larger 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.
Leading indicators are a heads-up for economists and investors who hope to anticipate trends. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate about trends in the economy. However, they are still indicators, and are not always correct.
- An indicator can be any statistic that is used to predict and understand financial or economic trends.
- 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.
New housing starts also are a leading indicator. 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.
The overall money supply, which is tracked by the federal government, is a more complex leading indicator. 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 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.
Coincident indicators are analyzed and used as they occur. These are key numbers that have a substantial impact on the overall economy.
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.
Special Considerations on Economic 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.