Certain aspects of economic activity serve as indicators of business cycle phases. These economic factors can be characterized as a leading indicators, coincident indicators, or lagging indicators.
A leading indicator is an economic factor that changes before the economy transitions into a particular pattern or trend. A positive change in these indicators predict economic improvement while negative changes predict economic contraction. Leading indicators include:
- Stock market (e.g. S&P 500)
- New building permits
- New orders for consumer goods
A coincident indicator is a measurable economic factor that varies directly and simultaneously with the business cycle. In other words, coincident indicators confirm where the economy is and represent the current state of the economy. Coincident indicators include:
- Industrial production and related capacity utilization
- Employment levels (non-farm payroll)
A lagging indicator is a measurable economic factor that changes after the economy has started to follow a particular pattern or trend, but serve as a confirmation of the new trend. Lagging indicators help confirm long-term trends and differentiate long term trends from short-term reversals that occur in any trend. Lagging indicators include:
- Corporate profits
- Average duration of employment
Knopman Notes
Understanding economic indicators is important for analysts and investors in order to make quality business or investment decisions and recommendations. Candidates preparing for license exams should be able to demonstrate knowledge concerning these economic factors and their role as a part of a larger analysis.
Relevant Exams
Series 7, Series 65, Series 66, Series 79, Series 86
