Leading Indicator

Leading indicators give early signals about where the economy may be heading. They are useful to businesses, investors and policymakers who want to anticipate turning points in the business cycle.

Common examples include new orders for manufactured goods, building permits for new housing, purchasing managers' surveys, stock market prices, consumer confidence, the yield curve and initial claims for unemployment benefits. For example, a sharp fall in new factory orders may suggest that production and employment will weaken in the coming months.

The yield curve is one of the best-known leading indicators. When short-term interest rates rise above long-term rates, an inverted yield curve, it has often preceded recessions in several economies, although not every inversion has been followed by one.

Leading indicators are imperfect. They can give false signals, and the time between the signal and the actual change can vary considerably. For this reason, analysts usually look at several indicators together, sometimes combined into a composite leading index.