Leading Indicator

A leading indicator is a statistic that predicts trends in the economy or a particular industry. For example, the number of building permits issued is a leading indicator for the housing sector, because permits must be obtained before building begins. A move in a leading indicator for one time period is often not meaningful; but a string of increases or decreases, especially in conjunction with confirming data, points to a recovery or downturn. Because stock market prices are determined by the likelihood of future events, a leading indicator is a key tool for market analysts. Using a leading indicator is difficult, however. First, a leading indicator sometimes gives false signals -- it may not indicate a change in anything. Second, the lag time between the signal given by a leading indicator and the actual change in the economy or industry is often uncertain. And third, a leading indicator is only truly useful to an analyst when its signal is at least somewhat ambiguous. Once a leading indicator provides certain evidence of a trend, stock prices will already reflect that information.

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