FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Leading vs Lagging Indicators

Updated on April 29, 2024
Article byAbhilash Ramachandran
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Leading and Lagging Indicators

A leading indicator is an economic factor that tends to change before the economy starts to change and helps investors and market participants to predict changes in the economy, whereas a lagging indicator is a measurable economic factor based on the changes in the economy; this means that when there is a change in the economy, there will be a change in the lagging indicators. Traders use lagging indicators to arrive at transaction signals of a trend.

Leading vs Lagging Indicators Comparison

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Leading vs Lagging Indicators (wallstreetmojo.com)

Leading vs lagging indicators in trading are economic factors that enable the measurement of current market conditions and forecast market trends. To arrive at a certain indicator, statistical computing needs to be performed. Indicators enhance economic forecasting for market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.read more, organizations, economists, and investors alike.

Key Takeaways

  1. A lagging indicator is a measurable economic factor based on the changes in the economy. In contrast, a leading indicator is an economic factor that tends to change before the economy changes.
  2. Leading indicators show the changes in the future due to movements in the segments of the economy; lagging indicators actualize the happenings of the economy using facts and figures.
  3. Both are economic factors, leading indicators are used by economists, traders, or investors to predict an economic change, and lagging indicators prove the information regarding the change. 

Leading Vs Lagging Indicators – Comparative Table

BasisLeading IndicatorsLagging Indicators
MeaningA leading indicator is an economic factor that tends to change before the economy starts to change.A lagging indicator is an economic factor that changes only after the change in the economy has already taken place.
UsageLeading indicators are used to forecast significant shifts in the economy. Leading indicators serve as a red flag or heads-up for upcoming market disruption.Lagging indicators are used to determine the after-effects of the shift in the economy. They serve as proof of market movements.
AccuracyLeading indicators cannot always be accurate and can be misleading.Lagging indicators are based on economic events and hence can be relied on their accuracy.
TimeLeading indicators exist before a change in the economy.Lagging indicators exist after the change in the economy.
TrendThe trend followed by leading indicators might result in a change in the economy.The trend followed by the economy results in a change in the lagging indicators.
BasisLeading indicators show the possibility of a major change in the future which is based on individual movements of a segment of the economy.Lagging indicators confirm the changes in the economy and are based on facts and figures.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Leading Indicators Definition

Leading indicators have behavior to change before the economy changes. It might not be wrong to say that these indicators result in a change in the economy. These indicators change before the economy starts to make its move. Due to its preemptive nature, economists and traders rely on leading indicators to arrive at conclusions regarding forecasting significant shifts in the market.

Since these are just indicators, at times, they aren’t accurate. But, when put together with other data from the market, these indicators can be a key factor in forecasting the economy. This is because leading indicators are aggregated data collated by qualified sources and focus on specific economic segments.

An example would be the Purchasing Managers Index (PMI) which economists and traders closely monitor to forecast the Gross Domestic Product (GDP).

Another example would be the number of jobless claims, which indicates a weak economy. A rise in jobless claims would eventually harm the economy and the market. Inversely, if jobless claims dip, it showcases that the companies are doing good, resulting in a stronger market.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Leading vs Lagging Indicators (wallstreetmojo.com)

Lagging Indicators Definition

Lagging indicators are economic factors that have behavior to change post changes in the economic scenario. Movements in lagging indicators become evident only after the economy has moved in a particular direction and started to follow a particular trend. A lagging indicator does not help predict changes in the economy; however, it helps determine the after-effects of the change in the economy’s trend. Since these indicators are an outcome of a change in the economy, traders and economists can use lagging indicators to generate signals.

Quantitative investment strategies rule-based securities function based on the signals that are arrived at with the help of lagging indicators. The impact of an economic change and its trend is mimicked by the lagging indicator, which trails the price of the underlying assetUnderlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.read more.

An example would be the moving average of any security, which becomes traceable only after a change in the security price. As a result, the moving average has a flaw since there is a high possibility that the significant move may have occurred at a time not included in the calculation. This would result in entering the trade later, which may not be profitable.

Leading Vs Lagging Indicators -Infographics

Let’s see the top differences between leading vs lagging indicators.

Leading-Indicators-vs-Lagging-Indicators-info

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Leading vs Lagging Indicators (wallstreetmojo.com)

Leading vs Lagging Indicators – Features

Any indicator can lead to a wrong conclusion, so it is important not to focus solely on one change.

Both are economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others.read more that are based upon economic changes.

Market makers and economists rely upon both indicators to arrive at decisions or forecast any significant future changes in the economy.

  • Leading indicators give a heads-up or a red flag for economists and traders regarding a major market shift.
  • Lagging indicators serve as proof of a pattern or trend followed by the economy over some time.
  • Both indicators depend on the collated data available in the market through qualified sources.

Leading Vs Lagging Indicators – Key Differences

The followings are the key differences:

Leading-Indicators-vs-Lagging-Indicators

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Leading vs Lagging Indicators (wallstreetmojo.com)

Frequently Asked Questions (FAQs)

What are the examples of lagging indicators?

Some general examples of lagging economic indicators include unemployment, corporate profits, and labor cost per output unit.

Do lagging indicators, and leading indicators complement each other?

A lagging indicator measures current production and performance, whereas a leading indicator advises company leaders on achieving desired objectives. In addition, a lagging indicator is simple to measure but difficult to change, in contrast to a leading indicator that is dynamic but difficult to measure.

Why doesn’t a lagging indicator help in predicting future performance?

Lagging indicators validate long-term trends but do not foretell them. It is important because many leading indicators are frequently unstable, and short-term swings in them can hide turning moments or produce false signals.

Recommended Articles

This has been a Guide to Leading vs Lagging Indicators. We explain their definitions along with a comparative table, infographic, features & key differences. You may also have a look at the following articles –