Leading, Coincident and Lagging: Reading the Economy in Time Order

Start with a signal from financial markets. The spread between long and short Treasury yields is classed as a leading indicator, and an inverted curve, where short-term yields exceed long-term ones, has preceded every US recession since the 1950s with only rare false signals.

The timeliest labor figure, released every Thursday with only about a one-week lag. It is classed as leading because first-time claims for unemployment insurance show layoffs before the monthly employment report does.

New residential construction projects begun each month, counted from the start of foundation excavation. Housing is a highly cyclical sector sensitive to interest rates, which is why starts are treated as a leading indicator.

A monthly survey of purchasing executives at more than 400 US manufacturers. A reading above 50 signals expansion and below 50 contraction, and it arrives on the first business day of the month, ahead of official output data.

Published monthly by the Conference Board from a survey of roughly 3,000 households, with a base value of 100 set in 1985. It is read as a leading signal because household spending, the largest part of US GDP, follows how secure people feel about jobs and income.

The Conference Board combines ten leading components, among them initial jobless claims, building permits and the Treasury interest rate spread, into one composite. It is built to anticipate turning points, so it gathers several of the earlier stops into a single reading.

Now the trail turns to coincident measures. This count of net monthly change in paid US jobs comes from a survey of roughly 149,000 businesses and agencies, is released on the first Friday of each month, and is classed as coincident because it tracks hiring and layoffs as they happen.

The Federal Reserve measures the real output of manufacturing, mining and utilities each month. It is classed as coincident and gives a real-time view of the industrial side of the business cycle.

The broadest coincident summary of whether the economy is expanding or contracting. The Bureau of Economic Analysis issues advance, second and third estimates after each quarter, and two straight quarters of decline is a common informal rule of thumb for recession, though official dating uses a broader set of indicators.

Here the lagging group begins. The headline rate comes from a monthly survey of about 60,000 households, and the Conference Board classes it as a lagging indicator, one that confirms conditions rather than predicting them.

The most widely cited US inflation gauge, compiled monthly by the Bureau of Labor Statistics from roughly 94,000 price quotations. It is classed as lagging, and it is also used to index Social Security benefits and federal tax brackets.

The same price question with food and energy removed because they swing so much in the short term. Central banks watch it as a clearer sign of persistent inflationary pressure than the headline figure.

The trail ends with the policy response. The Federal Open Market Committee sets this overnight lending rate about eight times a year, raising it to cool an overheating economy and lowering it to stimulate a slowing one, using the other indicators on this trail as its guide.