Financial Planning, Budgeting, and Forecasting: Financial Intelligence Collection (7 Books)

CHAPTER SIX

The Nature of Leading Indicators

Now that we have a simplified method for recording and monitoring key economic data series, let’s look at some of the fundamental characteristics of leading and lagging indicators and their relationships to each other. Much of this thought process will be intuitive, but it’s important not to overlook the nuances.

If the year-over-year rate of change of one economic series (let’s call it series A) consistently leads the year-over-year rate of change in another (series B) in both upward and downward directions over repeated cycles in decade after decade, then we can usually conclude that series A has a causal relationship to series B.¹ This means that we might successfully use advances or slowdowns in ...