August 17, 2019 

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AMERICAN ECONOMIC ASSOCIATION: An organization of over 25,000 professional economists. Founded in 1885, this premier top-of-the-economic-association-list publishes the prestigious American Economic Review, arguably THE number one scholarly U.S. economic journal and the Journal of Economic Literature, arguably THE number one index of economic journal publications. The AEA, as acronymically inclined economists call it, also sponsors an annual conference where professional economists present scholarly papers on their latest scholarly research.

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Ten economic statistics that tend to move up or down a few months BEFORE business-cycle expansions and contractions. Most importantly, these measures indicate peak and trough turning points about three to twelve months before they occur. Leading economic indicators are one of three groups of economic measures used to track business-cycle activity. The other two are coincident economic indicators and lagging economic indicators.
Leading economic indicators provide monthly tracking of business-cycle activity. They give consumers, business leaders, and policy makers a glimpse into where the economy might be headed. When leading indicators rise today, then the rest of the economy is likely to rise in the coming year. And when leading indicators decline this month, then the economy is likely to decline in three to twelve months.

The actual measures used as leading economic indicators are collected by several different government agencies and private groups, including the Bureau of Labor Statistics and Standard and Poor. These measures are then compiled by economists and number crunchers at The Conference Board.

Ten Measures

The ten leading economic indicators that generally indicate business-cycle peaks and troughs three to twelve months before they actually occur are: (1) manufacturers' new orders for consumer goods and materials, (2) an index of vendor performance, (3) manufacturers' new orders for nondefense capital goods, (4) the Standard & Poor's 500 index of stock prices, (5) new building permits for private housing, (6) the interest rate spread between U.S. Treasury bonds and Federal Funds, (7) the M2 real money supply, (8) average workweek in manufacturing, (9) an index of consumer expectations, and (10) average weekly initial claims for unemployment insurance.

Each of these ten individual indicators is useful in its own right, but when combined as a composite measure, even greater insight into the business-cycle activity is achieved.

How They Track

Leading Indicators
Business Cycle
The exhibit to the right can be used to illustrate how leading economic indicators relate to the official tracking of business-cycle peaks and troughs.

First, take note of the somewhat jagged red line displayed in the exhibit. It provides a hypothetical tracking of real gross domestic product over several months. Two peaks are evident, labeled with P. One trough is displayed as well, marked by T.

A click of the [Leading] button reveals a thin blue that rises and falls a few months before real GDP rises and falls, thus anticipating the peaks and troughs of the business cycle. In effect, this blue leading indicator line parallels movements of the red real GDP line, but it does so earlier.

Looking Ahead

Leading indicators "predict" what the economy will be doing three to twelve months down the road. This information can help anticipate and possibly avoid the problems of unemployment and inflation that tend to arise during specific business-cycle phases.
  • If, for example, Dan Dreiling works in an industry that tends to suffer high rates of unemployment during contractions, then forecasting business cycle peaks that mark the onset of contractions can help him prepare for an upcoming layoff. He might want to postpone expenditures, add a little extra into his savings account, or even search for other employment.

  • Alternatively, if Winston Smythe Kennsington III has a great deal of financial wealth that could be reduced by inflation, then forecasting business cycle troughs that mark the onset of expansions can also provide valuable information. Knowing that an expansion is about to begin, he might want to rearrange his investment portfolio, transferring his financial wealth between stocks, bonds, and assorted bank accounts.

While individuals can personally benefit from economic indicators of business cycles, this information is perhaps even more useful to government policy makers (especially the President, Congress, and Chairman of the Federal Reserve System). Because the public has entrusted these folks with the responsibility of solving economic problems and guiding the country to prosperity, they MUST stay informed about business-cycle activity. NOT staying informed is just the sort of thing that can transform a President into an EX-President or an elected politician into a lobbyist.

While leading indicators TEND to predict business cycles, they are not always correct. In fact, leading indicators have actually predicted "12 of the last 9 contractions." In other words, they predicted 3 contractions that never happened.

Practical and Theoretical

Leading indicators are chosen primarily because they have been shown to work, to lead business cycle peaks and troughs. However, they also draw on theoretical cause-and-effect relations, capturing events that surface early in the complex cause-and-effect process that underlies business cycles.

The money supply, for example, is a leading indicator that captures an early cause-and-effect connection. A decrease in the money supply tends to reduce consumption expenditures made by households. But such changes are not likely to have an immediate impact on real gross domestic product and other aspects of aggregate economic activity.

In other words, a decrease in the money supply is likely to cause or contribute to the onset of a business-cycle contraction, but it does not do so overnight. It takes months. Noting that the money supply decreases today is an indicator that a contraction could very well appear a few months hence.

The Other Two

While leading economic indicators tend to attract the most notoriety, the other two--coincident and lagging--also have important roles to play in tracking business cycles.
  • Coincident: These are four measures that indicate the incidence of business-cycle peaks and troughs at the time they actually occur. Coincident economic indicators are a primary source of information used to document "official" business-cycle turning points.

  • Lagging: These are seven measures that generally indicate business-cycle peaks and troughs three to twelve months after they actually occur. Lagging economic indicators provide the final, conclusive evidence that peaks and troughs did occur, making it possible to direct attention to the next phase of the business cycle.


Recommended Citation:

LEADING ECONOMIC INDICATORS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2019. [Accessed: August 17, 2019].

Check Out These Related Terms...

     | business cycle indicators | coincident economic indicators | lagging economic indicators |

Or For A Little Background...

     | business cycles | business cycle phases | potential real gross domestic product | full employment | expansion | contraction | peak | trough |

And For Further Study...

     | investment business cycles | political business cycles | demand-driven business cycles | supply-driven business cycles | unemployment | inflation |

Related Websites (Will Open in New Window)...

     | Bureau of Labor Statistics | The Conference Board |

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