Leading indicator
An economic series that tends to turn before the wider economy does, such as new orders, building permits or the slope of the yield curve. Quick to signal a turning point, but prone to false alarms.
Where you will meet it
Leading indicator appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain the credit cycle and how it interacts with the wider business cycle
“Because credit conditions usually turn before output does, they are watched as a leading indicator, and a sharp tightening of lending standards is one of the more reliable early warnings of a slowdown.”
- Contrast the principal methods used to forecast the economy
“Leading indicator approaches track series such as new orders, building permits or yield curve slope that tend to move ahead of activity; they are simple and often signal turns, yet give false signals and can change when the economy changes.”
Practise it
Practise leading indicator until it is automatic: questions that explain every wrong option.
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