woensdag 29 oktober 2014

Correlation: leading Vs. coincident Vs. lagging indicator

The FRED site gives leading indicators for the U.S. When we compare that indicator to the coincident indicator we do see that there is a lag. This is consistent with the definition of coincident and leading indicators.

A coincident indicator gives the status on current economic data points in the present. These include indicators like the inflation rate. A leading indicator gives a prediction on future economic activity. For example bond yields.

This is why the coincident indicator always lags the leading indicator. See chart above.. We also have lagging indicators like the unemployment rate. Moreover, when we compare the coincident and lagging indicator with each other, we have a leading indicator. Because tops in the stock market often happen when the coincident indicator rises slower than the lagging indicator. The recession will be on the horizon as the ratio of coincident to lagging indicator falls.

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