How It Works
Popular leading indicators include average weekly hours worked in manufacturing, new orders for capital goods by manufacturers, and applications for unemployment insurance. Lagging indicators include things like employment rates and consumer confidence.
The business cycle has highs and lows. That's why predicting what's around the corner is one of the best (and most difficult) ways to protect and grow portfolios. Leading indicators, which are typically indices composed of a set of securities that tend to be very sensitive to economic fluctuations and thus move sharply higher during the early stages of expansion or lose value quickly when economic conditions deteriorate, can provide that crucial information.
[InvestingAnswers Feature: Leading Economic Indicators Cheat Sheet]
Leading indicators are often indexes, but they can also be certain stocks. For example, let's assume XYZ Company is an auto manufacturer. If XYZ Company stock typically falls before the rest of the automotive sector falls or rises before the rest of the automotive sector rises, we could consider XYZ Company a leading indicator in the auto industry.
