NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationEasy
An investment adviser is explaining the concept of a leading economic indicator to a client. Which of the following is considered a leading indicator?
- AUnemployment rate
- BConsumer Price Index (CPI)
- CGross Domestic Product (GDP)
- DStock market performance
Show answer & explanationAnswer & explanation
Correct answer: D. Stock market performance
Leading economic indicators are those that change before the economy as a whole changes, providing insights into future economic activity. Stock market performance typically anticipates economic turns.
Why the other options are wrong
- A. The unemployment rate is a lagging indicator, changing after economic trends are established.
- B. The Consumer Price Index (CPI) is a coincident or lagging indicator, measuring current inflation.
- C. GDP is a coincident indicator, reflecting current economic activity.
Leading Economic Indicator
An economic variable that tends to change before the overall economy changes, signaling future economic activity.
- Helps predict future economic trends (e.g., recessions, expansions).
- Examples include stock market returns, building permits, and manufacturing new orders.
- Not always accurate, but provides early signals.
Memory trick: Lead, Coincide, Lag: Predict, Confirm, Reflect the economic path.