What is a Lagging Indicator?

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.

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.