Leading vs. Coincident Indicators: What's the Difference?

The Definitions

An indicator is classified by when it turns relative to the overall business cycle. Leading indicators historically reach their peaks and troughs before general economic activity does; they capture commitments, expectations, and financing conditions that shape output months later. Coincident indicators turn at roughly the same time as the cycle; taken together they effectively define where the economy is right now. Lagging indicators turn afterward, confirming a change that has already occurred. Note that the classification is empirical and provisional: a series earns its label from its observed timing across past cycles, and series have been reclassified or dropped as the structure of the economy has changed.

What Belongs in Each Group

Classic leading series include building permits, manufacturers' new orders, average weekly hours in manufacturing, initial unemployment insurance claims, stock prices, credit conditions, the spread between long-term and short-term interest rates, and consumer expectations. Each records something decided now that will become production later. Classic coincident series are the four in The Conference Board's coincident index: nonfarm payroll employment, real personal income excluding transfer payments, industrial production, and real manufacturing and trade sales. Notice what they have in common — each is a direct measure of activity actually taking place, covering employment, income, production, and sales. Between them they capture the economy from four different angles at the same moment.

Why the NBER Uses Coincident Data to Date Recessions

The NBER's Business Cycle Dating Committee is not trying to forecast; it is trying to determine, after the fact, exactly when activity peaked and when it bottomed. That is a job for coincident indicators, and the series the committee has emphasized map closely onto the coincident index: real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, real manufacturing and trade sales, and industrial production. The committee weighs the depth of a decline, how widely it is diffused across the economy, and how long it lasts, and it does not apply the popular two-consecutive-quarters-of-GDP rule. Because coincident series are revised substantially after first publication, the committee waits — announcements have often come six months to a year or more after the turning point they identify.

How to Use Them Together

The three groups answer three different questions, and confusing them is the main error. Leading indicators address what conditions are being set up; coincident indicators address what is happening; lagging indicators address what has already worked through the system. A responsible reading looks for agreement across the groups: leading series weakening while coincident series still hold up describes an economy whose forward-looking commitments have softened, not one that has turned. Conversely, a leading index that has fallen for several months while employment, income, production, and sales continue rising is a reminder that leading signals have produced false alarms before. Nothing in this framework tells you what will happen next; it tells you which questions each series can and cannot answer.