Leading indicators are economic indicators that change before the economy as a whole changes. They are therefore useful to predict short-term change in the level of economic activity. Stock markets in general are very good leading indicators, because they usually begin to decline before the general economy declines, and any turnaround in the underlying economic cycle is usually preceded by a recover in the stock markets. Other important leading indicators include the index of consumer expectations, money supply, building permits and inventory changes. Past performance has shown that leading indicators are not always accurate. So data should be considered in aggregate because each indicator has its own merits and shortcomings.
The Conference Board publishes a Leading Economic Index, consisting of ten indicators, intended to forecast economic activity in the U. S., six to nine months into the future. Components of the Conference Board’s Index include:
- Average weekly hours (manufacturing)
- Average weekly jobless claims for unemployment insurance
- Manufacturers’ new orders for consumer goods/materials
- Vendor performance
- Manufacturers’ new orders for non-defense capital goods
- Building permits
- Standard & Poor’s 500 stock index
- Money Supply (M2)
- Interest rate spread
- Index of consumer expectations
Critics argue that the Conference Board’s Index of Leading Economic Indicators is not actually forward-looking because the data is almost two months old, and most of the component reports are released prior to the index itself.