Traffic lights are an example of important indicators.
Indicators are a way of measuring performance. They are important in many aspects of our lives. They provide feedback on what is happening, how we can improve, and alert us to impending changes that we may need to prepare for. An important indicator is simply a warning sign of future events.
We all use leading indicators in our daily lives. A good example is the dashboard of a car. It has multiple indicators that alert you to a problem before it happens, so you can take action and avoid car trouble, running out of gas, etc. A traffic light is another example of a leading indicator. The traffic light turns yellow, a warning signal, before turning red, telling you to stop.
A car dashboard is an example of an important indicator.
The main role of leading indicators is to help change and improve future results. In economics, where the term is most commonly used, leading indicators change before the economy changes. They are the first warning signs that indicate that we must proceed with caution.
In 1995, the Commerce Department’s Bureau of Economic Analysis created a private nongovernmental organization, the Conference Board, to determine a monthly index. The index, called the Leading Indicators Index, is calculated from ten different variables. The main indicators used to calculate the index include things like the level of the S&P 500 index, the value of the inflation-adjusted money supply, and the average number of new jobless claims filed in the previous month.
There are many factors in the manufacturing industry that are taken into account when calculating the KPI. The number of new orders for goods and manufacturing materials is considered, as well as the speed with which suppliers deliver the new goods. Also included in the equation is the average weekly hours worked by manufacturing employees. Last but not least, consumer sentiment and the number of new residential building permits are considered.
Historically, these ten variables declined before a recession. However, no system used to predict the future is perfect. One problem with the index of leading indicators is that the delay between the signal of a possible recession and the actual recession fluctuates. The index also fell occasionally, without a recession following.
Regardless of their accuracy, leading indicators are useful because they provide an early warning of impending problems. It is an indication that we need to take a closer look, examine what is happening, assess the accuracy of the information, and make any necessary adjustments for the future.