Leading indicator

In economics, a series that has tended to change direction ahead of the wider cycle, because it measures a decision taken early. Building permits are granted before construction spends, new orders are placed before output rises, initial jobless claims move before the unemployment rate does, and the slope of a government bond curve prices a view of policy before that policy is set. Statistical agencies and research bodies publish composite indexes that bundle several such series into one reading, precisely because no single one of them is reliable on its own.

In chart work the label is applied to indicators that measure the rate of change of price rather than its level, chiefly the oscillator family. The reasoning is that momentum slows before direction changes, so a reading can reach an extreme while price is still making progress. The arithmetic underneath is the awkward part: an oscillator is computed from prices that have already traded, exactly like a smoothed average, so what leads is the interpretation placed on the reading rather than the data feeding it. This is a real and unresolved disagreement, not a quibble, and it is why the same indicator appears in one author's leading list and another's lagging one.

Three limits apply to both settings. A series that leads on average across many cycles need not lead in the cycle being lived through, and the record of any composite index includes turns it called that never came. Economic releases are revised, sometimes substantially, so the ordering that made a series look early can change months after the fact. And an early reading is by construction a reading taken with less information, which is the cost paid for the lead rather than a defect that better calibration would remove.