Economic Indicators: A Guide to Leading, Lagging, and Coincident Types

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Economic indicators fall into three types according to when they move relative to the business cycle. Leading indicators tend to change before the broader economy turns, so they are used for forecasting. Coincident indicators move at roughly the same time as the economy and describe current conditions. Lagging indicators change only after a trend is under way, so they confirm what has already happened. Yield curves, housing starts and purchasing managers’ surveys are classic leading indicators. GDP, personal income and industrial production are coincident. The unemployment rate and inflation measures are usually treated as lagging.

What an Economic Indicator Is

An indicator is a statistic used to understand or predict economic and financial trends. Indicators are tools of macroeconomics: they describe the economy as a whole rather than a single firm or market. The most closely watched ones are published on a regular schedule, usually monthly or quarterly, by government agencies and established private sources. In the U.S. these include the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Census Bureau. Because the surveys repeat on a fixed calendar, each new reading can be compared with a long history. Central banks use them to set monetary policy, governments use them in budgeting, companies use them to plan investment, and investors use them to price stocks and bonds.

Leading Indicators: Signals Before the Turn

Leading indicators tend to shift ahead of the broader economy. Many of them capture decisions about future activity: orders placed, permits filed, hours scheduled, money lent.

Yield Curve

A yield curve plots the interest rates of bonds with the same credit quality but different maturities, typically U.S. Treasuries.

• Normal (upward-sloping): long-term rates exceed short-term rates. This is generally consistent with expected growth.
• Inverted: short-term rates exceed long-term rates. Inversions have historically come before recessions.

The usual explanation is that an inverted curve reflects tight current policy alongside market expectations of lower rates later, which tends to happen when a slowdown is expected.

Housing Starts and Building Permits

Housing starts count new residential construction projects. When starts rise, builders are betting on future demand. When starts fall, builders are worried about homes they cannot sell. Construction also pulls in materials, labor, furnishings and financing, so a change in starts spreads to other sectors. Building permits come even earlier, because a permit is filed before construction begins.

Purchasing Managers’ Index (PMI)

The PMI is built from monthly surveys of private-sector purchasing managers in manufacturing and services. It asks about new orders, output, employment, supplier deliveries and inventories.

• A reading above 50 indicates expansion compared with the prior month.
• A reading below 50 indicates contraction.

The PMI leads because purchasing managers see changes in orders before those changes show up in output and employment figures.

Money Supply

The total amount of money circulating in the economy can point to future strength or weakness.

• Faster growth in the money supply has often been associated with stronger activity ahead.
• A contraction can signal a coming slowdown.

Other Common Leading Indicators

Composite leading indexes, such as the Conference Board’s Leading Economic Index, combine several series. Typical components include:

• average weekly hours in manufacturing, since employers cut hours before they cut jobs
• initial claims for unemployment insurance
• new orders for manufactured goods
• stock prices
• consumer expectations
• the interest rate spread between long-term Treasuries and the fed funds rate

Stock prices lead because they reflect investors’ expectations of future earnings. An index such as the S&P 500 often turns before the economy does, although markets also fall for reasons that never become a recession.

Coincident Indicators: The Economy Right Now

Coincident indicators move together with overall economic activity, so they describe the present or the very recent past. The main ones are:

• Real GDP: total output adjusted for inflation. See real vs. nominal GDP for why the adjustment matters.
• Personal income (often measured excluding government transfer payments): higher income coincides with a stronger economy.
• Nonfarm payroll employment: the number of people on payrolls, as opposed to the unemployment rate.
• Industrial production: output from factories, mines and utilities.
• Manufacturing and trade sales, along with retail sales.

In the U.S., the National Bureau of Economic Research dates recession peaks and troughs mainly from this group of measures. That is why “coincident” effectively defines the cycle.

Is GDP a Coincident or Lagging Indicator?

By classification, GDP is coincident: it measures output during the period it covers. In practice it arrives late. U.S. GDP is reported quarterly, the first estimate comes out about a month after the quarter ends, and later revisions can change it materially. That is why monthly coincident series such as payrolls and industrial production are watched to fill the gap.

Lagging Indicators: Confirmation After the Fact

Lagging indicators change after the economy has already turned. They are not useless for that reason. They separate a real trend from a temporary blip.

• Unemployment rate: employers usually hold staff until a slowdown is clear and wait until a recovery is secure before hiring. A rate that has risen for several consecutive months confirms that the economy has slowed. Because fewer jobs mean less spending, it also suggests the weakness may continue.
• Consumer price index (CPI): inflation tends to respond slowly to changes in demand. Composite lagging indexes include services inflation for that reason. The Federal Reserve raised the fed funds rate repeatedly to fight post-pandemic inflation, and the effect showed up in CPI only over time.
• Corporate profits: reported quarterly, after the activity that produced them.
• Average duration of unemployment, the prime rate, outstanding commercial loans, and the ratio of inventories to sales: each tends to peak or trough after the cycle does.

How the Three Fit Together: An Example

A hypothetical sequence around a downturn, not a forecast or a fixed pattern:

1. The yield curve inverts and building permits decline.
2. The PMI falls below 50 as new orders weaken, and factories trim weekly hours.
3. Initial jobless claims begin to rise.
4. Payroll growth stalls, industrial production drops, and real GDP contracts. The coincident indicators now show that the economy is in decline.
5. Months later, the unemployment rate is still climbing and inflation is easing. These lagging moves confirm the downturn, and they may continue even after the leading indicators have started to recover.

The same order runs in reverse during a recovery. This explains why headlines can look contradictory: rising unemployment and a rebounding PMI can appear in the same month because they measure different stages of the cycle.

Exceptions That Change the Reading

Track records change. The yield curve correctly signaled the nine recessions between 1955 and the late 2010s, with one false positive. The inversion of the early 2020s was not followed by a prompt recession. Structural shifts in the economy and changes in policy can weaken a signal that once worked well.

Lead times vary. A leading indicator signals that a turn is more likely, not when it will come. Gaps between signal and recession have ranged from several months to more than a year.

Classification depends on the measure. Employment appears in all three groups in different forms: initial claims lead, payrolls are coincident, and the unemployment rate and duration of unemployment lag. Labeling “jobs data” as one type misses this.

Data get revised. Early readings of GDP, payrolls and other series are often revised, sometimes enough to change what they appeared to show.

Shocks distort signals. During the COVID-19 pandemic, many traditional indicators became unreliable because activity was disrupted and survey collection was impaired. Economists turned to high-frequency data such as credit card spending and mobility reports for a closer view of the present.

FAQs

The Bottom Line

Investors, business planners and anyone following economic headlines can read indicators better by knowing which stage of the cycle each one measures. Leading indicators suggest that a turn is more likely without saying when, coincident measures describe current conditions, and lagging data confirm a trend. Reading several together, while allowing for revisions and shocks, explains why rising unemployment and a rebounding PMI can appear in the same month.