How the Fed Works

Economic indicators are categorized as leading, coincident, or lagging. Leading indicators anticipate the direction in which the economy is going. Coincident indicators tell the Fed about the economy's current status. Lagging indicators help the Fed determine how long a downturn or upturn in the economy will last because these indicators are affected months after an upturn or downturn has begun.

By studying the indicators as they fall into these categories, the Fed can determine the phase of the business cycle that the economy is in at the time. The four phases of the business cycle are:

The categories of "leading," "coincident," and "lagging" indicate the turning points of the economy relative to the business cycle. As the economy moves from one phase to the next, these indicators change.

For more detailed information about how economic indicators work, check out Economic Indicators on the Fed 101 Web site.