Some economic indicators are better predictors than others. Knowing the major categories of indicators can help you identify which indicator is right for the job at hand. Here are the three main types of indicators, based on how timely they are:
Leading indicators: These indicators generally signal changes before changes actually occur in the economy. However, few leading indicators anticipate both expansions and recessions well. Examples of leading indicators include the New Residential Construction report (excellent for identifying a future expansion), the Consumer Sentiment Index (good for identifying an upcoming recession), and the PMI (formerly known as the Purchasing Managers' Index and a well-rounded indicator for identifying both expansion and contraction).
Lagging indicators: Changes in the economy occur before lagging indicators change. For example, employment as shown by the Employment Situation report tends to continue to fall or grow very slowly as the economy comes out of a recession (even though unemployment rates often rise as the economy enters a recession). Lagging indicators may not tell the future, but they're great for confirming where the economy has been and whether it's heading toward recession or expansion. If an indicator that lags recessions starts rising, for example, you can be quite sure that the trough has been reached and the expansion has begun.
Coincident indicators: These indicators may not offer much in the way of forecasting ability, but they do tell a lot about current economic conditions. Examples include the Gross Domestic Product (GDP) report and the Personal Income and Outlays report (specifically the personal income statistics).
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