Economic indicators are classified by their timing relative to the cycle. Leading indicators turn before the cycle. Coincident indicators turn with it. Lagging indicators turn after. Understanding which category an indicator falls into is the first step in reading economic data critically.
- 01Classify a set of common indicators as leading, coincident, or lagging.
- 02Explain why leading indicators are noisy in real time.
- 03Read the Conference Board's Leading Economic Index.
Leading
Building permits, ISM new orders, stock prices, the yield curve, initial unemployment claims. They turn before broader activity does, which is why they are watched. They are also the noisiest — false signals are common, and any single leading indicator is a poor guide.
Coincident
Nonfarm payrolls, industrial production, real personal income excluding transfers, real business sales. They confirm the current state of the economy but rarely warn of turns.
Lagging
The unemployment rate (it peaks after the recession), CPI, labor cost per unit of output, prime lending rate. They confirm the story after it has ended and are useful for calibrating policy responses but not for anticipating turns.
- Every indicator lives in a timing class. Know which.
- Leading indicators are noisy. Composite indices help.
- The unemployment rate is a lagging indicator.