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Leading Indicators

Leading Indicators are the economic or financial indicators that are used to determine and predict the future. These are just opposite to lagging indicators that are used to measure past performance. The leading indicators are more commonly and usually used to predict the new phase of business cycle. Leading indicator is the type of indicator that changes even before the economy changes in total contrast to the lagging indicator that changes after the economy has undergone a change. There is another type of indicator known as coincident indicator that changes simultaneously with the changes in economy.

Some of the leading indicators include the stock prices in a stock market that changes every second worsening and improving just ahead of the similar changes in the economy. Consumer leading indicators, money supply, building permits and index of consumer expectations form the list of other leading indicators. There are ten leading indicators that are designed to predict economic activity in US economy ahead of six to nine months.

The leading indicators are instrumental and help in forecasting and predicting future economic events. In the world of finance and economy, leading indicators occupy a special place and play an important role with immense accuracy. The best example of leading indicator is bond yield. Bond yields are the leading indicators in stock market on the basis of which bond traders usually anticipate the future course of the stock market and also that of the economy of the country.

The classification of factors is a matter of concern and debate in the subject of economics. For some economic experts Federal Reserve is a leading indicator but some other professionals consider Federal Reserve as a lagging indicator. But the trends present in the market indicate whether Federal Reserve changes interest rates according to the trends in the market or market reacts with the changing of interest rates by the Federal Reserve. So people can consider Federal Reserve both as a lagging as well as leading indicator.

Many of the available KPIs or performance indicators informs what has already happened. But to effectively manage the organization or company’s performance one should be able to predict exactly the financial and economic trends in the future markets. This is where the ability of successful financial manger’s skills is put to test. For him leading indicators are the best available market tools that can be used effectively and efficiently for the financial planning of the organization.

The leading indicators are proportionally related to lagging indicators. With the improvement of leading indicator, even the lagging indicator also improves. KPIs, Lagging indicators and leading indicators function hand in hand. KPIs or performance indicators inform us what has happened, lagging indicators predict the outcome and impact of what has happened as known from the performance indicators and the leading indicators are used to predict the future outcome by collaborating the data.

People can effective use the leading indicator in correlation with the lagging indicator to predict the future impact on the markets perfectly for the benefit of one and all.

Tags: Economics, finance, interest rates, market, money, price

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