What Is A Lagging Economic Indicator?
A lagging economic indicator is an economic statistic which changes after major changes happen in the economy. Unlike leading indicators, lagging indicators are not used to forecast changes in the economy. Instead, they are used to identify long-term economic trends.
Examples Of Lagging Economic Indicators
To understand the most relevant economic indicators, one could view data pulled from the Composite Index Of Lagging Indicators. This index is published every month via the Conference Board and includes data from seven major lagging indicators. These seven indicators are listed below.
- Average duration of unemployment
- Inventory to sales ratio, manufacturing and trade
- Labor cost per unit of output, manufacturing
- Average prime rate
- Commercial and industrial loans
- Consumer installment credit to personal income ratio
- Consumer price index (CPI) for services
These indicators measure a variety of things like corporate business volume, inflation, interest rates, etc. However, one thing they all have in common is that they tend to change after a major change in the economy has already taken place. Hence, they are all referred to as lagging economic indicators.
Analyzing Lagging Economic Indicators
As stated before, lagging indicators are not used to forecast changes in the economy. However, they can still be useful. Lagging economic indicators are commonly used to confirm trends. By analyzing lagging economic indicators, one can also learn about how certain factors will react to similar economic changes in the future.
Significance of Lagging Economic Indicators:
Lagging economic indicators are important because they provide information on the state of the economy after a significant change has occurred. They are used to confirm trends and patterns that have been identified through leading and coincident indicators. Lagging indicators are also used to provide a baseline for future economic performance. Here are some of the key reasons why lagging economic indicators are significant:
Confirmation of Trends
Lagging economic indicators are used to confirm trends that have been identified through leading and coincident indicators. For example, if leading indicators suggest that the economy is slowing down, lagging indicators such as GDP and industrial production can confirm this trend.
Baseline for Future Performance
Lagging economic indicators are used as a baseline for future economic performance. They provide a reference point for assessing future economic changes. For example, if the unemployment rate is high, policymakers can use this as a reference point to measure the success of their policies to reduce unemployment in the future.
Evaluation of Policies
Lagging economic indicators are also used to evaluate the effectiveness of policies. If policymakers implement policies to reduce unemployment, the unemployment rate can be used to measure the success of these policies. Similarly, if policies are implemented to reduce inflation, the CPI can be used to measure the effectiveness of these policies.
Limitations of Lagging Economic Indicators:
While lagging economic indicators are useful, they do have some limitations. Here are some of the key limitations of lagging economic indicators:
Delayed Information
Lagging economic indicators provide information on changes in the economy that have already occurred. This means that the information provided by lagging indicators is delayed. By the
time policymakers receive the data, the economic situation may have already changed. This can make it difficult to use lagging indicators to make immediate policy decisions.
Revisions to Data
Lagging economic indicators are subject to revisions as more accurate data becomes available. This can make it difficult to use lagging indicators for long-term planning or to make policy decisions based on current data.
Narrow Focus
Lagging economic indicators only provide information on specific aspects of the economy, such as unemployment or inflation. This can make it difficult to get a complete picture of the overall economic situation. Policymakers may need to use multiple lagging indicators to get a more comprehensive understanding of the economy.
Conclusion:
Lagging economic indicators are an important tool for understanding the state of the economy after significant changes have occurred. They provide a confirmation of trends and a baseline for future economic performance. Lagging indicators are also used to evaluate the effectiveness of policies. However, there are limitations to lagging indicators, including delayed information, revisions to data, and a narrow focus. Policymakers should use a combination of leading, coincident, and lagging indicators to get a comprehensive understanding of the economy and make informed policy decisions.
