Table of Contents
A lagging indicator is a metric that reveals changes to the performance of an asset, a market, or the broader economy, but only after the shift has either taken place, or has begun to take place.
Investors, economists and others use lagging indicators to confirm ongoing trends, rather than to forecast future shifts. Some well-known lagging indicators include unemployment, inflation rates, Gross Domestic Product (GDP), and corporate profits. Because these changes occur across the broader economy, they can’t be statistically captured until after the fact.
The opposite of a lagging indicator is a leading indicator, which investors rely upon to anticipate future changes. Leading indicators, however, can be volatile, and their short-term fluctuations may create false signals for investors.
Key Points
• A lagging indicator tracks changes to the performance of an asset, market, or economy only after the shift has already taken place or begun.
• Investors most often use lagging indicators to confirm ongoing trends and provide a reliable baseline of historical data for decision-making.
• Economists, bankers, regulators and investors rely on these indicators because they draw on established data to help explain what is happening in the markets or economy.
• One shortcoming of lagging indicators is their inability to predict or anticipate future shifts; they may be less useful during periods of sudden, major volatility.
• Among the best-known lagging indicators are Gross Domestic Product (GDP), the Consumer Price Index (CPI), unemployment rates, corporate profits, and interest rates.
• Investors often use lagging indicators alongside leading indicators to confirm the reasoning behind a potential trade.
What Is a Lagging Indicator?
A lagging indicator is a metric, available after the fact, that reveals or confirms a change to the value of an asset, or a market, or an entire economy. The reason it’s called a lagging indicator is that the information that it indicates has already occurred.
Lagging indicators are essential to how investors, economists, regulators, bankers, and other professionals understand the markets and the economy. Because lagging indicators draw on established data, they often form the foundation of how people look at the economic life around them, when investing online (or through other channels) and making financial decisions.
There are shortcomings to lagging indicators. They can inform predictions, but can’t predict. They can confirm ongoing trends, but not anticipate them. Some well-known lagging economic indicators include Gross Domestic Product, corporate profits, unemployment and inflation rates.
How Do Lagging Indicators Work in Economics?
Because economists attempt to understand large-scale movements across markets, industries and societies, they rely heavily on lagging indicators. Gathering nationwide, sector-wide, or market data takes time, which means that most of the indicators they watch are necessarily lagging.
Economists rely on lagging indicators as a reliable baseline of data. From that baseline they can draw historical analogies, or apply economic theories to attempt to understand or explain what is happening, and what may come next.
Leading vs. Lagging Indicators: Key Differences
Leading indicators are the opposite of lagging indicators. A leading indicator is data that investors use to anticipate future changes.
One example of a leading indicator for investing in stock is a company’s outstanding contracts, which tell the story of revenue that its existing customers have committed to.
In the broader economy, one example of a leading indicator is home starts, which tracks the beginning of construction on a new home or residential building, or the New Orders Index. The Conference Board publishes an index for the Leading and Lagging Economic Indicators.
While leading indicators may offer some insight into the future, these indicators can fluctuate suddenly, creating false signals for investors.
5 Common Examples of Economic Lagging Indicators
Among economists trying to understand the big picture, lagging indicators are a key building block. As such, people watch them closely, and the financial news is filled with stories about these indicators when they are published, usually on a quarterly basis. The most-watched ones include Gross Domestic Product (GDP), Consumer Price Index (CPI), unemployment rates, corporate profits and interest rates.
1. Gross Domestic Product (GDP)
Gross Domestic Product (GDP) reflects the entire value of the goods and services produced by a given country. In the United States, the Bureau of Economic Analysis (BEA) estimates the GDP quarterly and annually, as a lagging indicator.
To reduce the lagging element of the GDP, the BEA has begun to publish GDP statistics every month in the form of an advance estimate a month after the quarter’s end, a second estimate and third estimate incorporating additional data.
Economists and the general public watch the GDP because the percentage that GDP rises or falls from quarter to quarter is an important gauge of how the broader economy is doing. The BEA also estimates GDP for each state, county, and U.S. territory, as well as by industry. As such, GDP can address questions like how fast the economy is growing or shrinking, how each industry and each state’s economy is performing, comparably.
GDP numbers make headlines and drive policies related to everything from spending and tax policy to interest rates and monetary policy.
2. Consumer Price Index (CPI) and Inflation
The Consumer Price Index (CPI) is another lagging indicator with the power to make headlines. It is compiled by the U.S. Bureau of Labor Statistics, and published monthly. It tracks the prices paid by consumers for consumer goods and services, with the aim of measuring the inflation people experience every day.
As an economic indicator it’s widely used by policymakers to measure inflation and to make economic decisions. More directly, the CPI is a key metric in re-setting Federal income-tax rates, Social Security payments, and cost-of-living wage adjustments for many workers. And for investors, the CPI has a direct impact on the performance of a wide range of sectors, from travel and tourism, to consumer staples, to retailers.
3. Unemployment Rates
Unemployment is a vital factor when trying to understand the health of the economy. And the U.S. Bureau of Labor Statistics published an estimate of how many Americans are unemployed each month. It’s not an easy thing to track, so it uses estimates of the people employed, unemployed, and not in the labor force based on a sample of roughly 60,000 households.
It defines the unemployed as people not working, though actively seeking a job, or on temporary layoff, who are separate from people who are not working and not looking for work, including retirees, full-time students, and stay-at-home parents.
The unemployment number is important for investors in several ways. It gives an idea of whether spending in some sectors is likely going up or down. It is also used by legislators when making decisions around policy and spending, and the Federal Reserve when deciding to raise or lower interest rates.
4. Corporate Profits
One of the most-watched lagging indicators is corporate profits, which offer a summary corporate financial health. The Bureau of Economic Analysis releases its figures and analysis of corporate profits every quarter.
More than just tracking the success of corporations, profits also offer a sense of the future, as they provide much of the funding for investments to increase future productivity. The estimates of profits and of related measures may also be used to evaluate the effects on corporations of changes in policy or in economic conditions.
5. Interest Rates
Interest rates represent the cost of borrowing money. There are different rates for different borrowers, though, and they’re tracked by different organizations and agencies. But the different rates tend to move up and down in sync with one another.
The cost of borrowing money has a direct impact on all kinds of economic activity, from how many people buy new cars or homes, to whether or not a corporation decides to purchase a competitor. This is why investors watch the announcements of the Federal Reserve with baited breath.
The Federal Reserve sets the interest rate on the funds it lends, which then influences borrowing costs for corporate bonds, business loans, credit cards, and mortgages. An increase in the Fed funds rate immediately increases the Bank Prime Loan Rate, which is what banks charge their most credit-worthy clients, which trickles down to consumer credit and other loans with higher rates.
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How Investors Use Lagging Indicators in Trading
Lagging indicators can be used for several purposes. One use is to confirm trends in a given asset, sector, market or in the broader economy, such as a moving average, to get a sense of the market’s upward or downward momentum market’s momentum rather than fighting it.
One lagging indicator that investors often rely upon is the moving average convergence divergence (MACD). It shows the momentum swings in individual stocks or the markets as a whole, by showing the relationship between the average prices over different periods. Most commonly, investors will look at moving averages of 15, 20, 30, 50, 100, and 200 days, with the 50- and 200-day averages being the most widely used.
Investors also use lagging indicators alongside leading indicators to confirm the reasoning behind a given trade that they may be considering. Lagging macroeconomic indicators are also vital for investors to assess whether their investment strategies align with economic realities.
Pros and Cons of Using Lagging Indicators
Investors should consider the advantages and disadvantages of using lagging indicators in their own investing strategies.
Pros
Lagging indicators can offer a sense of what a broad market or even an entire economy has done in the recent past.
Because lagging indicators draw on established and confirmed data, they can form the foundation of how the markets approach new information.
Cons
Lagging indicators can inform predictions, and confirm trends, but they can’t anticipate changes.
When markets are undergoing sudden, major changes, such as the 2020 Covid lockdowns, lagging indicators may not offer much insight.
The Takeaway
Lagging indicators track the past performance of an asset, a market, or the broader economy, revealing changes after they have already occurred. While lagging indicators cannot predict future shifts, they are essential for investors and economists, providing a reliable baseline of confirmed data to understand historical trends, contextualize volatility, and evaluate current economic conditions.
Common examples of lagging indicators include Gross Domestic Product (GDP), the Consumer Price Index (CPI), unemployment rates, corporate profits, and interest rates. All of these lagging indicators help investors understand the present, and make trading decisions.
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FAQ
What is the main purpose of a lagging indicator?
Lagging indicators offer a picture of what’s happened with a stock, a market or the broader economy in the recent past. As such, it can offer valuable context for investors about what’s going on now, and what may come next.
Can a lagging indicator predict a recession?
Lagging indicators can’t predict future events. But there are some lagging indicators that have historically preceded recessions, such as rising unemployment, sinking consumer confidence and an inverted yield curve.
Why are lagging indicators useful if they look at the past?
Lagging indicators can offer perspective to investors during periods of volatility because they provide an overview of what a broad market or even an entire economy has done in the recent past. Thus they are a common reference point that the market as a whole is using to understand new events as they occur.
Are interest rates a leading or lagging indicator?
Interest rates are a lagging indicator, as they track the recent cost of borrowing money. That said, the interest rates themselves represent an attitude about the future. When the markets are optimistic, rates tend to be lower, because lenders feel assured that they will be paid back. When the markets are pessimistic about the future, rates are often higher, because lenders want to be paid more for taking on extra risk.
How do lagging indicators affect stock market prices?
Whenever new economic data comes out, it has the potential to move the markets. This is especially true when the numbers come as a surprise, and contradict the assumptions that investors have baked into their strategies. Unemployment, CPI & inflation, GDP and corporate profits, are just a few that can affect the markets broadly. Surprises in one of those key figures is unlikely to affect all stocks the same way, however, as different industries, sectors and individual companies have differing levels of sensitivity to the different conditions being tracked.
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