Leading and Lagging Economic Indicators

I. Leading Economic Indicators

Leading indicators signal future economic activity. They tend to change before the economy as a whole changes and are useful for predicting short-term economic performance.

1. Stock Market Returns

• Explanation: The stock market typically anticipates future economic conditions. Rising stock prices suggest investor confidence and expected growth, while falling prices may indicate a downturn.

• Why It Leads: Investors buy or sell based on future expectations.

2. Manufacturers’ New Orders (Durable Goods)

• Explanation: This measures new orders placed with manufacturers for durable goods (items expected to last at least three years).

• Why It Leads: An increase suggests businesses are confident in future demand and economic growth.

3. Building Permits for New Private Housing

• Explanation: The number of permits issued for new residential construction.

• Why It Leads: Rising permits indicate future construction activity and growth in related sectors.

4. Consumer Sentiment / Confidence Index

• Explanation: Measures how optimistic or pessimistic consumers are regarding their future financial prospects.

• Why It Leads: Confident consumers are more likely to spend, boosting economic activity.

5. Initial Jobless Claims

• Explanation: Tracks the number of people filing for unemployment benefits for the first time.

• Why It Leads: An increase may suggest a weakening job market, while a decline indicates improvement.

6. Average Weekly Hours (Manufacturing)

• Explanation: The average number of hours worked in manufacturing.

• Why It Leads: Longer hours suggest increased demand and upcoming hiring.

7. Money Supply (M2)

• Explanation: Measures the total amount of money available in the economy (cash, checking deposits, and easily convertible near money).

• Why It Leads: An increase in M2 suggests more liquidity, often boosting spending and investment.

8. Yield Curve (10-year Treasury vs. Fed Funds Rate)

• Explanation: When short-term interest rates are higher than long-term rates, the yield curve inverts—often a recession signal.

• Why It Leads: Investors expect future rates and growth to decline.

9. New Business Startups

• Explanation: Reflects entrepreneurial activity and economic optimism.

• Why It Leads: A rise indicates confidence in future profitability and economic expansion.

II. Lagging Economic Indicators

Lagging indicators reflect changes that have already occurred. They confirm trends rather than predict them.

1. Unemployment Rate

• Explanation: Measures the percentage of the labor force that is jobless and actively seeking employment.

• Why It Lags: Employment typically recovers after economic growth resumes.

2. Consumer Price Index (CPI)

• Explanation: Measures changes in the price level of a market basket of consumer goods and services.

• Why It Lags: Inflationary trends are often a result of earlier economic shifts like changes in demand or supply.

3. Interest Rates (Prime Rate or Fed Funds Rate)

• Explanation: Central banks adjust interest rates in response to past economic performance.

• Why It Lags: Policy changes follow inflation or growth trends, not precede them.

4. Corporate Profits

• Explanation: Represents the profits earned by corporations, published quarterly.

• Why It Lags: Profits reflect past sales and cost structures.

5. Balance of Trade

• Explanation: Measures the difference between a country’s exports and imports.

• Why It Lags: Trade balances adjust slowly to changing economic conditions.

6. Average Duration of Unemployment

• Explanation: Tracks the average number of weeks individuals remain unemployed.

• Why It Lags: Even after recovery starts, hiring can be slow, keeping this metric high.

7. Labor Cost per Unit of Output

• Explanation: Measures the cost of labor required to produce one unit of output.

• Why It Lags: This reflects prior employment costs relative to productivity changes.

Summary Table: