What Is the Leading Economic Index

Economic indicators fall into three kinds according to their "timing" relative to the flow of the economy.

Leading indicators move before the economy changes. Examples: stock prices, building permits, new orders.

Coincident indicators move at roughly the same time as the economy. Examples: employment, industrial production, personal income.

Lagging indicators follow after the economy has changed. Examples: the duration of unemployment, service prices.

Looking at all three together lets you gauge, in three dimensions, which phase the economy is in now and where it is headed next.

The most widely cited leading index is the LEI (Leading Economic Index) of the U.S. private research organization The Conference Board. It is a composite index that combines several leading indicators into one, and according to the Conference Board it is known to signal turning points in the economy on average about 7 months in advance.

The LEI is built as the average of 10 components: ① average weekly hours in manufacturing, ② weekly initial jobless claims, ③ new orders for consumer goods and materials, ④ the ISM new orders index, ⑤ new orders for nondefense capital goods (excluding aircraft), ⑥ new private housing building permits, ⑦ the S&P 500 stock price, ⑧ the leading credit index, ⑨ the interest rate spread (10-year Treasury minus the federal funds rate), and ⑩ consumer expectations.

The coincident index (CEI), made of four series — employment, personal income, industrial production, and manufacturing and trade sales — correlates highly with real GDP, and the lagging index serves to filter out false signals.

Leading indices are not unique to the U.S.

In Korea, Statistics Korea publishes a "composite economic index" split into leading, coincident, and lagging, released monthly. Here the composite leading index is made up of the inventory cycle indicator, construction orders, the KOSPI, and so on.

The OECD also publishes composite leading indicators (CLI) for member countries, allowing comparison of economic flows across nations.

What matters more than the index itself is the "direction and trend." A rise or fall spread over several months carries more signal than the ups and downs of one or two months.

The leading index is a tool for predicting the "economy," not a tool for predicting "stock prices" or "trade timing."

Using it to sell stocks the moment the leading index falls, or buy when it rises, can actually lose you money. The S&P 500 stock price is already among the LEI's components, so it partly reflects the market, and the index sometimes gives false signals.

In fact, there have been past cases where the leading index fell for several months yet no recession came. So it is safer to use the leading index as "background knowledge for understanding the phase of the economy" and not to make investment decisions based on it alone.