Business, Legal & Accounting Glossary
A leading indicator predicts the future performance of an economy. Bond yields, in particular, can be regarded as good leading indicators.
A leading indicator is a statistic that predicts trends in the economy or a particular industry. For example, the number of building permits issued is a leading indicator for the housing sector, because permits must be obtained before building begins. A move in a leading indicator for one time period is often not meaningful; but a string of increases or decreases, especially in conjunction with confirming data, points to recovery or downturn. Because stock market prices are determined by the likelihood of future events, a leading indicator is a key tool for market analysts. Using a leading indicator is difficult, however. First, a leading indicator sometimes gives false signals — it may not indicate a change in anything. Second, the lag time between the signal given by a leading indicator and the actual change in the economy or industry is often uncertain. And third, a leading indicator is only truly useful to an analyst when its signal is at least somewhat ambiguous. Once a leading indicator provides certain evidence of a trend, stock prices will already reflect that information.
Business leading indicators include:
These are termed as pre-financial data. Since they can be measured well before full effects roll out via a business organization’s profit and loss statements, which affects shareholder value. Leading indicator data can enable a company to virtually see the future growth path of that organization. Hence companies can identify problem areas and design potential solutions for them beforehand. This way companies can get ready with an effective backup action plan well before a potential crisis turns out of hand. Leading indicators are qualitatively different from standard business metrics. Standard business metrics are like rearview mirrors. However sophisticated, they report results, which have already happened. Leading indicators are measurements, which provides an estimation of the future. Both of these two concepts need to be utilized for a proper understanding of business situations. However for the proper prediction of future performance of a business organization a systematic approach is needed. Leading indicators include following.
These indicators give an indication of interest rate also. Other types of related indicators are coincident indicators and lagging indicators. Coincident indicators occur almost simultaneously to concerned events to which they are related. A lagging indicator follows the occurrence of a concerning event. Thus, in summary, a leading indicator is essentially a statistic, which is used for predicting economic trends of a nation or a particular industry in an economy. Since stock market prices are in principle determined by the likelihood of occurrence of future events leading indicators act as key market analytical tools. However, experts are needed for interpretation and use of leading indicators in economic analysis.
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This glossary post was last updated: 28th March, 2020