Evaluating Economic Indicators for Forecasting

A senior economist at a wealth management firm is tasked with providing insights on predicting future economic trends for their clients. This economist is considering the use of various forecasting tools, particularly focusing on the implications of using leading, coincident, and lagging economic indicators. In a recent discussion, it was revealed that despite having a strong academic background, the effectiveness of these indicators in accurately predicting turning points of the economy is debatable.

The economist is particularly interested in understanding which type of indicator is most reliable for forecasting economic conditions, especially for asset allocation decisions. As part of their analysis, they have narrowed down their options to three forecasting tools: a leading economic index (LEI), Gross Domestic Product (GDP), and employment data. They must assess the predictive accuracy of each tool for future economic conditions.