Wouldn't it be nice to have a crystal ball that lets you see exactly where the economy is going? Yes. But even though we don't have a crystal ball, runes, or even a financial-themed tarot deck, that doesn't mean we're flying blind. We can still read the signs of where the economy is headed and provide informed and proactive guidance to our clients by looking at leading and lagging indicators.
Ready to learn a little more about the financial planner's fortune telling tools? We're breaking down what leading and lagging indicators are, providing examples of each, and exploring how to use them in practice.
Read more about it: Check out our article, "A Financial Planner's Guide to the Four Phases of the Business Cycle," for some additional insights in how to forecast and plan for economic shifts.
What Are Leading and Lagging Indicators
Leading and lagging indicators help you see upcoming economic conditions and trends and understand their outcomes. Where leading indicators look to the future, providing early warnings of economic changes, lagging indicators reflect on shifts that have already occurred.
Leading Indicators
Leading indicators are the statistics that tend to change before the overall economy shifts or moves into the next business cycle. They act as early signals for upcoming expansions or contractions.
Examples of Leading Indicators
Examples of leading indicators include:
- Yield Curve: Interest rate changes can be a sign of broader economic changes, and an inverted yield curve has historically warned of recessions months in advance.
- Purchasing Managers' Index (PMI): This monthly economic indicator tracks manufacturing and service sector activity like production levels, order volume, and employment. It provides insight into the health of these sectors and signals changing growth patterns before they are reflected in GDP figures.
- Building Permits: An increase in building permits and new housing starts shows an increase in construction and real estate activity, forecasting jobs and spending tied to the sector and acts as an overall indicator of economic expansion.
- Consumer Confidence Index (CCI): This gives an early look at how people are feeling about their money and the economy. If the index goes up, people are feeling good and are more likely to spend and invest. Since consumer spending makes up the biggest portion of the GDP, increased confidence can lead to real growth in the economy a few months later.
Lagging Indicators
Lagging indicators only reflect changes after the broader economy has already shifted and serve to confirm trends that you may have anticipated with leading indicators. These are a good way to validate your earlier decisions and build on long-term plans and strategies.
Examples of Lagging Indicators
- Unemployment Rate: An increase in the unemployment rate reflects a slowdown of the economy, while a decrease shows recovery. Either shift is a result of employers responding to changes rather than anticipating them.
BIF Pro Tip: Treat this indicator carefully. The unemployment rate only measures the proportion of people who are actively seeking work and are unemployed, relative to the total labor force. So, if someone stops looking for work and leaves the labor force, both the numerator (unemployed) and the denominator (labor force) decrease. This can cause the unemployment rate to fall, even though the actual employment situation has not improved.
- Consumer Price Index (CPI): The CPI tracks inflation and when it shows prices going up, it means the economy has already gone through a phase of growth or contraction. Basically, it shows how the average cost of goods and services has shifted after bigger economic trends have played out.
- Corporate Profits: Corporate profits reflect the financial health and performance of companies only after broader economic trends or events have happened. So, if the economy enters expansion or contractions, the changes in corporate profits tend to be delayed since it takes time for the shifts in consumer demand, supply chain costs, and overall economic activity to filter through to reported earnings and financial statements.
A Note on Coincident Indicators
A coincident indicator is an economic measure that changes at roughly the same time as the overall economy, reflecting its current state or phase within the business cycle. These indicators move in tandem with economic expansions or contractions, helping economists, investors, and policymakers assess how the economy is performing right now—as opposed to leading indicators (which predict future trends) or lagging indicators (which confirm past movements).
Examples of Coincident Indicators
- Employment levels, which tend to move closely with production and consumption
- Industrial production that reflects output in manufacturing, mining, and utilities
- Personal income (not including transfers) to indicate consumer earning power
- Real GDP to summarize the economy's overall real-time performance
Why Is It Important to Track Leading and Lagging Indicators?
Let’s talk about leading and lagging indicators for financial planning and how they can help you navigate the ups and downs of the economy with your clients. Basically, if think of financial planning as a road trip where you're driving your clients to their financial goals, leading indicators are what you see ahead of you through the windshield and lagging indicators are what you see in the rear-view mirror. They help you look back and see how your decisions played out by showing you what’s already happened.
If you’re only watching lagging indicators, you might end up reacting a bit too late—the changes have already happened, and your clients could feel the impact before you do anything about it. But if you rely just on leading indicators and skip the confirmation step, you might make moves too soon, or act on signals that don’t pan out. By combining these perspectives, you'll get a more complete, data-informed picture. You can stay nimble with what’s coming and also check your progress with what’s already happened to keep client strategies strong and flexible, no matter what the economy throws your way.
How to Apply Leading and Lagging Indicators in Financial Planning
Leading indicators can help you anticipate changes before they occur, helping to inform your day-to-day decision making and enhancing your client communications. Lagging indicators serve to validate how effective your previously implemented strategies were and can provide evidence-based reporting. But now, let's talk about how to apply them when building or modifying financial plans.
Use Leading Indicators to Adjust Investment Portfolios
You can monitor leading indicators like the Purchasing Managers’ Index, consumer confidence, or the yield curve to anticipate economic expansions or recessions. For example, if leading indicators signal a likely downturn, planners might recommend shifting client portfolios toward more defensive assets or increasing cash reserves before the market fully reacts.
Validating Financial Plans and Strategies with Lagging Indicators
Lagging indicators like the unemployment rate, corporate profits, and the Consumer Price Index will help you confirm economic trends after they are underway. By reviewing these indicators, you would be able to assess whether previous investment or spending strategies matched the economic reality. From there, you can adjust long-term plans accordingly.
Timing Credit and Debt Management
Leading indicators such as new housing permits or credit application volumes can signal changes in borrowing trends and consumer confidence. You can use this information to advise clients on when to consider acquiring or paying down debt. Lagging indicators, including interest rates and inflation measured by CPI, guide planners on the cost of borrowing and purchasing power, informing decisions on refinancing or fixed versus variable rate debt strategies.
Customize Indicator Selection Based on Your Clients' Objectives
While you want to have your finger on the pulse of leading and lagging indicators, you don't need to dig into every single one. Instead, consider the indicators that will best reflect what you need to know for your specific clients. For example, advisory firmst that focus on retirement planning may prioritize economic sentiment or job market trends. For clients considering purchasing a home, look at PMI, CCI, and the yield curve.
Here's an example of choosing indicators looking through the lens of tax planning.
| Indicator Type | Example | Tax Planning Impact |
| Leading | Anticipated tax rate increases | Accelerate income, Roth conversions |
| Leading | Expected market downturn | Harvest losses, accelerate distirbutions |
| Lagging | Realized inflation | Increase withdrawals, adjust asset allocation |
| Lagging | Actual Social Security COLA | May increase taxable Social Security Income |
| Lagging | Enacted tax law changes | Adjust withdrawal timing and asset location |
Build Your Knowledge as a CFP® Professional
Earning your CFP® certification will help you build more advanced financial planning knowledge so you'll have a stronger understanding of trends and can build more future-proof plans for your clients. At BIF, we've helped over 32,000 candidates become CFP® professionals with our CFP Board-registered education coursework and exam prep. Download our free ebook, Become a CFP® Professional with BIF to see how we help you achieve your career goals!
Keep Learning with CE for CFP® Professionals
If you already have your marks, make sure you fulfill your CE requirements with our partners!
STCSTC offers CFP Board compliant IAR programs that build your knowledge of ethics, professional responsibility, and investment practices. |
BeckerBecker offers dozens of CPE courses for CFP® professionals in areas of tax planning, estate planning, and more |
