# Understanding Leading Indicators: Predicting Economic Trends for Investors

> **Definition**
>
> A leading indicator is a measurable economic data point that can help forecast future economic activity and trends before they occur.

## What Is a Leading Indicator?

A leading indicator is a measurable set of data that may help to forecast future economic activity. Businesses, policy makers, and investors can use them to predict changes in the [economy](https://www.investopedia.com/terms/e/economy.asp) before it begins to shift.

Examples include the consumer confidence index and the purchasing manager's index, which are used with other metrics to forecast changes in economic behavior. Leading indicators are one of three main types of indicators. The other two are [lagging indicators](https://www.investopedia.com/terms/l/laggingindicator.asp) and [coincident indicators](https://www.investopedia.com/terms/c/coincidentindicator.asp).

### Key Takeaways

*   Leading indicators are crucial for forecasting future economic trends and can be valuable tools for investors, businesses, and policymakers looking to anticipate market conditions and adjust strategies accordingly.  
    
*   Examples of leading indicators include the Consumer Confidence Index, Purchasing Managers' Index, initial jobless claims, and the yield curve, each offering unique insights into different facets of economic activity.  
    
*   Accuracy and reliability vary among leading indicators; therefore, it's advisable to use a combination of various indicators to gain a comprehensive understanding of potential economic and market shifts.  
    
*   While leading indicators can signal upcoming changes, they are not foolproof and should be used in conjunction with other data and analysis for effective decision-making.  
    
*   Understanding the differences between leading, lagging, and coincident indicators can provide a more holistic view of economic performance and forecasting.

![Leading Indicators](https://www.investopedia.com/thmb/wSINeFEL2YJxW13dGPVURQpeLxU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/leadingindicator.asp-final-140f12beff5f454f8958628c5773cb78.png)

*— Investopedia / Julie Bang*

## How Leading Indicators Predict Economic Trends

Leading indicators must be measurable to be useful as predictors of where the economy may be headed. Policy makers and [central bankers](https://www.investopedia.com/terms/c/centralbank.asp) use leading indicators when setting [fiscal](https://www.investopedia.com/terms/f/fiscalpolicy.asp) or [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp). Businesses study them to anticipate the effect of future economic conditions and then make strategic decisions regarding markets and revenue.

All businesses track their own [bottom lines](https://www.investopedia.com/terms/b/bottomline.asp) and [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp), but such data are lagging indicators, meaning they're produced by events that have already happened. Importantly, a business’ past performance does not necessarily indicate how it will do in the future. 

Investors use leading indicators to guide their [investment strategies](https://www.investopedia.com/terms/i/investmentstrategy.asp) as they try to anticipate market conditions. Many focus on those indicators directly related to the [stock market](https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp). These can include the housing market, retail sales, building permits, business startups, and more.

## Key Examples of Leading Economic Indicators

### Purchasing Managers’ Index

Economists closely watch the [Purchasing Managers’ Index (PMI)](https://www.investopedia.com/terms/p/pmi.asp) because it shows trends in manufacturing and services. It can signal [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) growth based on material demand from companies.

### Durable Goods Orders

[Durable goods orders](https://www.investopedia.com/terms/d/durable-goods-orders.asp) is a monthly survey of manufacturers that is produced by the U.S. [Census Bureau](https://www.investopedia.com/terms/b/bureauofcensus.asp). It measures industrial activity in the durable goods sector and the state of the [supply chain](https://www.investopedia.com/terms/s/supplychain.asp).

### Consumer Confidence Index

Along with durable goods orders, many people consider the [Consumer Confidence Index (CCI)](https://www.investopedia.com/terms/c/cci.asp) to be one of the most accurate leading indicators. This index surveys consumers about their attitudes toward the economy and their perceptions of economic activity going forward.

### Jobless Claims

The U.S. [Department of Labor](https://www.investopedia.com/terms/d/dol.asp) provides a weekly report on the number of [jobless claims](https://www.investopedia.com/terms/j/jobless-claims.asp) as an indicator of the economy’s health. A rise in jobless claims indicates a weakening economy, which could have a negative effect on the stock market. A drop in jobless claims may indicate that companies are growing (and hiring), which can be positive for the stock market. 

### Yield Curve

Many market participants consider the [yield curve](https://www.investopedia.com/articles/investing/110714/understanding-treasury-yield-curve-rates.asp) to be a leading indicator. Of particular interest is the spread between two-year and 10-year Treasury yields. This is because two-year yields in excess of 10-year yields have been correlated to both recession and short-term market [volatility](https://www.investopedia.com/terms/v/volatility.asp). If such an [inverted yield curve](https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp) occurs, it may signal that a [recession](https://www.investopedia.com/terms/r/recession.asp) is approaching.

### Company Performance

While not a metric issued by economists or government agencies, customer complaints or negative online reviews can be seen as a leading indicator of customer dissatisfaction that may signal problems with a business’ product quality or service failures. These can point to lower future [revenue](https://www.investopedia.com/terms/r/revenue.asp), [growth](https://www.investopedia.com/terms/g/growthcompany.asp), or [profits](https://www.investopedia.com/ask/answers/031015/what-difference-between-gross-profit-operating-profit-and-net-income.asp). Conversely, positive customer satisfaction data may suggest that these factors will trend upward in the future.

> **Important**
>
> Leading indicators often involve tradeoffs between accuracy, precision, and the time they predict future events.

## Evaluating the Accuracy of Leading Indicators

### Navigating Conflicting Economic Signals

Leading indicators are not always accurate. However, looking at several leading indicators in conjunction with other types of data may provide actionable information about the future health of an economy.

 An ideal leading indicator predicts economic or business changes accurately over a considerable time. In practice, all leading indicators vary in performance.

For example, new orders for [capital goods](https://www.investopedia.com/terms/c/capitalgoods.asp) can give early warnings of economic downturns with plenty of lead time. However, the historical lead time between turning points in capital goods and a specific target indicator such as changing stock prices or GDP may range from 12 to 24 months. You end up with data indicating a long lead time for action but low precision about when to take it.

What's more, the magnitude of changes in capital goods new orders might not bear any consistent relationship with the size of changes in GDP, making it inaccurate except as an indicator of timing. Thus, this indicator is valuable as a long-term warning but can’t precisely estimate the timing or scale of future [trends](https://www.investopedia.com/articles/trading/09/what-factors-create-trends.asp).

On the other hand, a leading indicator might give highly accurate and precise information about a turning point or trend in the market or the economy, but only over a few months or quarters. Such an indicator could provide detailed input for [estimating the trends that affect your business or investments](https://www.investopedia.com/terms/e/economic_derivatives.asp). But it might not provide that information in sufficient time to take full advantage of the insight gained. 

Both types of leading indicators can be helpful alone, but neither gives a complete picture for maximizing performance. In practice, this means that using a range of different leading indicators that are more or less accurate, precise, and forward-looking can provide the best opportunity to capitalize on future trends. 

> **Fast Fact**
>
> While leading indicators can provide insight into the advisability of taking actions as a government, a business, or an investor, they have nothing to do with the impact that results from taking those actions.

## Comparing Leading and Lagging Economic Indicators

Leading indicators are used to predict future economic performance. Lagging indicators reflect past economic performance and confirm economic changes and financial market patterns.

### Leading Indicators

*   Measurable data that can indicate a potential upcoming change in the economy before it happens.
*   They can alert users to specific economic changes and/or changing trends.
*   Used by economists, analysts, businesses, and investors to predict and take action ahead of economic/financial change.
*   Not always accurate and can be enhanced when studied with other economic data.
*   They are based on data related to the activities of different areas of the economy.

### Lagging Indicators

*   Measurable data that reflects the effects of economic activity after it happens.
*   They can confirm for users certain economic and business trends, quality of performance, and the impact of business decisions.
*   Used by government, businesses, and investors to determine future strategies as they relate to proven (or unproven) assumptions and expectations.
*   Data is considered reliable.
*   They are based on facts and financial outcomes that relate to economic activities that previously occurred.

## What Are Leading and Lagging Indicators?

Leading indicators are measurable pieces or sets of data that may suggest future economic, business, or investment trends. A lagging indicator is a measurable figure or set of data that changes at some point after an economic or business trend occurs.

## What Are the 3 Types of Economic Indicators?

Leading indicators are one of the three main types of broader economic indicators. The others are lagging indicators (which reflect past activity) and coincident indicators (which reflect current activity).

## Where Can I Find Reports on Leading Indicators?

The reports are issued by various government agencies and other organizations. Certain business publications (e.g., the _Wall Street Journal_) will publish a calendar of upcoming announcements as well as the actual data. Some of the entities responsible for the data include the The Conference Board (Consumer Confidence Index), the U.S. Department of Labor (jobless claims), and the U.S. Census Bureau (durable goods orders).

## What Is an Example of a Leading Indicator?

One of the most famous examples is the Consumer Confidence Index (CCI). This is a survey regularly performed by The Conference Board to determine how optimistic or pessimistic consumers are about their expected future financial situation.

## The Bottom Line

Leading indicators have the potential to be a highly valuable tool for economists, investors, business owners, and consumers. When used properly, they can signal upcoming changes and broad trends in the economy.

However, the economy is not guaranteed to behave in the way that leading indicators suggest, and it is crucial that you know which indicators are most appropriate to evaluate and how to properly use them. Professional analysts look to a variety of economic measures to model the economy, rather than relying on any single indicator.

> **Article Sources**
>
> 1.  Federal Reserve Bank of Chicago. “[Which Leading Indicators Have Done Better at Signaling Past Recessions?](https://www.chicagofed.org/publications/chicago-fed-letter/2019/425)”
>     
> 2.  Moody’s Analytics. “[United States—Purchasing Managers Index](https://www.economy.com/united-states/purchasing-managers-index).”
>     
> 3.  U.S. Census Bureau. “[Why New Data on Durable Goods Matter](https://www.census.gov/library/stories/2018/07/manufacturers-durable-goods.html).”
>     
> 4.  The Conference Board. “[U.S. Consumer Confidence](https://www.conference-board.org/topics/consumer-confidence).”
>     
> 5.  U.S. Bureau of Labor Statistics. “[How the Government Measures Unemployment](https://www.bls.gov/cps/cps_htgm.htm#top).”
>     
> 6.  Forex.com. “[Treasury Yields Explained: What Does the Yield Curve Tell Us?](https://www.forex.com/ie/news-and-analysis/treasury-yields-and-yield-curves/)”