Difference Between Leading and Lagging Indicators

Indicators 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.

What are the Leading Indicators?

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 indicate 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.

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What are Lagging Indicators?

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 starts 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 the 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. The moving average can be determined 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 that is 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.

Key Differences

The followings are the key differences:

  • Leading indicators focus on the future situation of the economy, whereas lagging indicators focus on the past movements of the economy.Leading indicators tend to change before a change in the economy, whereas lagging indicators tend to change after a change.The accuracy of a leading indicatorLeading IndicatorLeading Indicators are statistics which help in a Company’s macro-economic forecasts & predict the emerging stage of a business cycle. They act as a variable with economic linkage offering details about early signs of turning points in the business cycles, which precede the lagging & coincident indicators. read more cannot be guaranteed; however, the accuracy of a lagging indicator can be relied upon.Leading indicators are monitored to predict any future movements in the markets. Lagging indicators are monitored after movements in the market.Leading indicators are input-oriented, whereas lagging indicators are output-oriented. This means that leading indicators are hard to measure, whereas lagging indicators are easy to measure.

Leading vs Lagging Indicators Comparative Table

Conclusion

  • 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 the 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 are based on the data available in the market which is collated by qualified sources.

This has been a guide to Leading vs Lagging Indicators. Here we discuss the top differences between Leading and Lagging Indicators along with infographics and comparative table. You may also have a look at the following articles –

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