Practically every day another economic indicator is released. Some of the indicators get a lot of attention by market players and economists, some don't. The degree of importance depends on the stage of the business cycle we are in or whether certain facets of the economy are problematic. For instance, inflation indicators such as the CPI and PPI are less relevant during recessions when prices are not likely to rise rapidly. Indicators that measure labor market activity, such as the unemployment rate, new jobless claims and the help wanted index, are more important during recessions or the start of recoveries.

Sometimes it is helpful to know whether indicators are leading ones, that is, telling us in which way the economy is headed, or whether they are coincident, simply telling us where the economy stands now. The index of leading indicators gets big bold headlines in the non-financial press, but financial market cognoscenti realize that this index long ago fizzled out as a good predictor of economic activity. Nevertheless, many of the components of the index remain good leading indicators on their own, especially new orders, the factory workweek and supplier deliveries (part of the ISM manufacturing index).

We have compiled the major indicators that are reported daily into a table that shows whether they are leading, coincident or lagging. We have also created columns for indicators that fall in between these three main headings.

Leading Indicators
We have included ten indicators in the leading category. Durable goods orders and factory orders are leading indicators for production. The set of housing indicators (MBA purchase applications, housing starts, new and existing home sales) are generally the most sensitive to changes in interest rates and thus will show whether economic activity is likely to expand or contract. They also precede changes in spending on furniture and appliances. The average workweek tends to predict changes in employment since employers are likely to change the number of hours worked before they hire or fire staff. Many economists and market players use average hourly earnings as an indicator of future inflationary pressures.

Leading/coincident
Many of the indicators in this category are not necessarily leading indicators, but they are reported early in the month and thus have some leading qualities. Generally, these indicators are telling us about current conditions in the economy. Residential construction should really be a leading indicator but construction expenditures are released with a two-month delay, so it doesn't quite have the leading properties of housing starts.

Coincident Indicators
The bulk of the economic indicators that we follow regularly are coincident indicators - telling us about current economic conditions. Sometimes, these feel like old news because they are reported with a lag. Market players and economists love to follow nonfarm payrolls because they are reported early in the month with a very short lag. Similarly, motor vehicle sales and weekly chain store sales (BTM, Redbook) are reported early in the month. GDP growth and nonfarm productivity are reported with a longer delay. By the time the Commerce Department has revised GDP data twice, it's stale and irrelevant.

Coincident/Lagging Indicators
Inflation indicators tell us about the current month, but many economists consider these to be lagging indicators because they reflect what has already happened in the economy. The Challenger job-cut report reveals layoffs, which typically happen after the economy is already starting to slow down. Non-residential construction spending is not as sensitive to interest rates as it is to economic growth; consequently, this indicator does not have the leading qualities of residential construction.

Lagging Indicators
Lagging indicators are typically reported with a two-month delay, with the unemployment rate an exception. In the case of inventories, these usually start building after the economy has slowed and demand for goods has moderated. However, it may take more than a month or two to notice deterioration in demand. The unemployment rate is a lagging labor market indicator because it usually continues to rise after the economy has already begun to recover. That's because discouraged workers, who had dropped out of the labor force, start looking for work again after they think that it may be easier to find a job. But the unemployment rate remains a favorite indicator among economists and market players because it is reported early in the month.

The Bottom Line
It is useful to know whether indicators are leading, coincident or lagging because sometimes you'll find pundits trying to weave a story about the economy that doesn't make sense, that mixes apples and oranges. Leading indicators are trying to tell us where we are headed, while lagging indicators tell us where we have been. When one takes into account the fact that indicators are relaying information about different time periods (future, present and past), the relationships between economic indicators begin to take on life.

Evelina M. Tainer, Chief Economist, Econoday