Some common examples of leading indicators are, stock market returns.
While stock market returns are probably not the most important leading indicator, they are probably the best known and most widely followed leading indicator.
The stock market is considered a leading indicator because investors expectations about future economic conditions directly influence stock prices.
If investors believe the economy will improve, stock prices tend to rise in anticipation of higher corporate earnings.
Conversely, if investors expect the economy to worsen stock prices often fall as they anticipate declining earnings.
Thus, the stock market can reflect the collective expectations about the economy's future direction before it becomes evident in economic output or employment levels.
Manufacturing new orders, purchasing managers index, or PMI.
The PMI is a leading indicator because it measures the economic health of the manufacturing sector based on new orders, inventory levels, production, supplier deliveries, and employment environment.
An increase in new orders suggests that manufacturers will need to ramp up production to meet demand signaling future economic growth.
Conversely, a decline indicates a potential slowdown. Building permits.
The number of building permits issued is a leading indicator as it reflects future construction activity, which requires significant planning and investment ahead of actual economic output.
An increase in building permits suggests future growth in construction related employment and investment indicating broader economic expansion.
A decrease might signal a future slow down in these areas.
