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What is a Lagging Indicator?

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  • Written By: Brendan McGuigan
  • Edited By: Niki Foster
  • Last Modified Date: 22 September 2016
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Economic indicators are events that give information about the economy as a whole. They are used to analyze economic behavior and predict how the economy will act in the near future. There are three main types of economic indicator: coincident, leading, and lagging indicators.

A coincident indicator happens in tandem with an economic event. Company payrolls are coincident indicators, for example, because they make payment and simultaneously increase the localized economy.

Leading indicators are events which happen immediately before an economic shift. The state of the major stock markets is one of the major leading indicators in the global economy. A strong stock market indicates a strengthening economy, whereas a weak stock market indicates an economic downturn.

A lagging indicator is an event which happens after the corresponding economic cause occurs. An example of a closely monitored lagging indicator is the unemployment rate of a country. As the economy weakens, the unemployment rate increases correspondingly.

Economic indicators may be pro-cyclical or counter-cyclical, depending on whether they increase or decrease as the economy strengthens. Unemployment, for example, is a counter-cyclical lagging indicator, because as the economy goes up, unemployment goes down. Average wages are a pro-cyclical lagging indicator, because as the economy goes up, wages also increase accordingly.

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Like many topics in economics, the classing of what is and is not a lagging indicator is open to some debate. The Federal Reserve, for example, is held by some to be a leading indicator, and others to be a lagging indicator. Looking at the data, it could be argued either that the market reacts to the Federal Reserve changing interest rates, or that the Federal Reserve changes interest rates solely in response to the market. The Federal Reserve can be viewed more realistically as both a leading and lagging indicator, lagging one market cycle and leading the next.

The media is another important lagging indicator to the general economy. Stories are always reported at least a few hours behind the actual economic shift that they indicate, and often a day or a week later. For this reason, many economic advisors caution against basing investment decisions on mainstream media information.

For obvious reasons, a lagging indicator is not nearly as useful for investment or predicting the economy as a leading indicator. A lagging indicator can, however, give great insight into the behavior of the economy, and if properly analyzed may be used to gain some insight into possible future actions of the economy.

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Moldova
Post 3

@Sneakers41 - I agree and I have to say that one of the biggest lagging economic indicators has to be the unemployment rate. The unemployment rate is a lagging indicator because it is a secondary problem to a worsening economy. The unemployment rate rose because companies had to cut expenses to meet the demands of the failing economy.

Many people feel that until we see more economic growth indictors like a rise in the housing starts or an increase in consumer retail spending, I am afraid that these dismal economic figures are going to continue to erode the economy and you will see the unemployment figures rise as well as the amount of short sales and foreclosures.

It is really a shame because a lot of people really need to get back to work. I hope that the economy does improve for everyone's sake.

sneakers41
Post 2

I think that the consumer confidence index really shows a leading indicator of how the economy is doing because when the consumer confidence dips we know that people are not spending as much on goods and services and are holding on to their money because they are uncertain about what the future holds.

I definitely think that the condition of the housing market is a leading economic indicator because until the real estate market returns to normal, I don’t think anything else will. It is amazing how much the real estate market affects the overall economy.

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