Leading indicators definition
Leading indicators are economic data that correspond with future movements or changes in an area of business interest. They can help predict and forecast future events and trends in markets and the economy. Leading indicators vary in their accuracy and precision.
The purchasing managers’ index (PMI), consumer confidence index, initial jobless claims, average hours worked, and average earnings are examples of leading indicators.
Leading vs lagging indicators
Leading indicators are looking at the future while lagging indicators look at the past. When analyzing markets, it’s advisable to consider both.
A lagging indicator is a factor that alters after the economic or financial variable it measures changes. Economic lagging indicators can include the unemployment rate, central bank interest rates, gross domestic product (GDP), and consumer price inflation (CPI).
In business, lagging indicators are performance indicators reflecting recent output or past performance. These metrics can be seen in data or financial statements and prove the effect of management decisions or the business strategy.
Lagging indicators can be technical indicators placed on charts that trail the price of underlying assets. Traders might use technical indicators to generate signals or to confirm the strength of a trend. A basic example of lagging technical indicators is moving averages crossing on a chart indicating a change.