Lagging Indicators

TL;DR

• Indicators that change after an economic trend has already started and are mainly used to confirm that trend.
• Common examples include the unemployment rate and the inflation rate.
• Useful for validation but not reliable as sole predictors of future economic activity.

Definition

Lagging indicators are economic indicators that tend to change after the economy has already begun to follow a particular pattern or trend. These indicators are typically used to confirm or validate a given trend, rather than to predict future economic activity.

Explanation

Lagging indicators are based on historical data and therefore tend to reflect changes after those changes have occurred in the economy. Because they respond after trends are underway, they are useful for confirming that a trend exists. However, their reactive nature means they may not accurately reflect current or future conditions on their own. For a complete assessment of an economy’s state and prospects, economists and investors consider both leading and lagging indicators.

Examples

Unemployment rate

The unemployment rate reflects the percentage of the labor force that is actively looking for work but is unable to find a job. As a lagging indicator, the unemployment rate tends to increase during economic downturns, as more workers are laid off and struggle to find new employment. Conversely, the unemployment rate tends to decrease during economic booms, as more workers are able to find jobs and contribute to economic growth.

Inflation rate

The inflation rate reflects the rate at which the prices of goods and services in an economy are rising. Inflation can be caused by factors such as increases in the money supply, increases in production costs, and increases in demand for goods and services. As a lagging indicator, the inflation rate tends to increase after an economy has experienced growth, as higher demand for goods and services leads to higher prices.

Use cases

• Confirming or validating an observed economic trend rather than forecasting future activity.
• Complementing leading indicators to form a more complete picture of economic conditions.

Notes or pitfalls

• Lagging indicators are based on historical data and may not accurately reflect current or future economic conditions.
• They are reactive rather than proactive and may not provide enough information for effective decision making on their own.

Related terms

• Leading indicators