Leading indicators signal future changes and are therefore useful for making short-term predictions. Stock market indicators are a common example of leading indicators. Usually stock market returns will start to decline prior to an economy slipping into recession, and vice versa. Another such example is the difference between yields on ten-year and two-year U.S. Treasury bonds, which has proven to be a reliable predictor of recessions. A positive value indicates that investors prefer long-term investments and therefore are confident of future economic growth; negative values signal a preference for short-term investments resulting from a lack of confidence in the long-term situation. This indicator returned negative values shortly before the recession of the early 1990s, the tech-bubble crash in 2000-2001, and the financial crisis of 2007-2008.
Lagging indicators are somewhat the opposite of leading indicators, in that they track economic developments only after the economy has begun to follow a particular pattern or trend. Unemployment is the classic example of a lagging indicator. Movements in unemployment figures usually occur after the underlying economic conditions have begun to change, such as unemployment rates decreasing several quarters after an economy rebounds from a recession. Changes in consumer prices and gross domestic product are also considered by many to be lagging indicators, allowing measurement of prior economic activity. By their nature, lagging indicators cannot be used directly to predict economic changes; their use is in confirming specific patterns after the fact (which can then serve as the basis for further predictions).
Finally, coincident indicators occur at about the same time as the changes they signal. Wages are often provided as an example of a coincident indicator, as if the economy is strong and business is going well, personal income rates will increase at about the same time. However, the line between coincident and other indicators is sometimes blurred. GDP is considered by many to be a coincident indicator, not a lagging indicator, on the basis that it can be used to estimate current levels of economic activity. Others question this, pointing out that GDP estimates are often much less accurate than values calculated for prior time periods.
