Leading Indicators

Learning Outcomes

  • Identify leading and lagging indicators

Leading and lagging indicators are statistics or “metrics” that assess results toward goals (lagging indicator) and predict future conditions (leading indicator).

An arrow pointing left states “Lagging Indicators (assess the current state of business)”. An arrow pointing right states “Leading Indicators (predict future conditions)”.

Lagging Indicators

A lagging indicator measures current production and performance.

A prime example of a lagging indicator is net income from the financial accounting reports. Let’s say a company’s fiscal year begins on January 1. The company produces all year long and then, in January of the next year, it “closes” the books (makes sure all transactions are entered). It then prepares the financial statements which are reviewed or audited and published in February or March. For example, see the annual report for Macy’s, Inc. for the fiscal year ended January 30, 2021, at https://www.macysinc.com/investors/sec-filings/annual-reports that was audited by KPMG LLP and issued on March 29, 2021, which is a remarkably quick turn-around for such a big company. Even so, by the time you receive this report, you are looking at historical data and there is nothing management can do to change the operating loss of $4.475 billion dollars.

That is why management will focus on leading indicators to plan, control, and direct operations.

Leading Indicators

Leading indicators are used to control, direct, and plan future operations. For instance, in business, the number of sales orders outstanding can be a significant leading indicator. Sales orders drive future sales revenue and can help management control production to meet demand. Leading indicators are predictive, but they can be hard to identify, measure, and apply.

For example, employee turnover can be a leading indicator or a lagging indicator. Low employee morale could be a leading indicator of future high turnover, or current turnover could be an indication of salaries and wages that are not competitive.

In economics, unemployment rates are an indicator of what might happen to the economy in the future as consumers demand fewer products. Also, high employment and high consumer demand can be a leading indicator of future inflation.

Inflation itself is a lagging indicator, as is gross domestic product (GDP).

Leading indicators for business can be external as well. For instance, community college enrollment goes up as the economy enters a recession and unemployment increases, and it traditionally goes down as unemployment declines and more people are working.

Listen to an expert describe leading indicators:

You can view the transcript for “What is a leading indicator? What Are The Best Examples?” here (opens in new window).

Now, check your own understanding of leading and lagging indicators in business.

Practice Question