Lagging indicators are financial metrics that change after the economy as a whole changes. Lagging indicators confirm long-term trends, but they do not predict them. These indicators follow the economy and are often used to confirm that a pattern has occurred.
Key Takeaways
- Lagging indicators change after the economy changes and do not predict economic activity.
- Lagging indicators confirm long-term trends and are useful for identifying economic turning points.
- Examples of lagging indicators include the unemployment rate and corporate profits.
Understanding Lagging Indicators
Lagging indicators reflect the economy’s historical performance and are therefore only useful for confirming trends. Investors and economists use these indicators to confirm that a pattern has occurred rather than to predict future trends. Lagging indicators are particularly useful for identifying economic turning points, as they confirm changes in economic conditions after they have happened.
Examples of Lagging Indicators
Several lagging indicators are commonly used to assess economic performance:
- Unemployment Rate: The unemployment rate is a lagging indicator because it tends to rise after the economy enters a recession and falls after the economy begins to recover. When companies experience declining revenues, they may lay off workers, causing the unemployment rate to increase. Conversely, as the economy improves, companies may hire more workers, leading to a decrease in the unemployment rate.
- Corporate Profits: Corporate profits are another lagging indicator. During economic downturns, companies often experience declining profits as consumer spending decreases and operating costs rise. Conversely, during economic expansions, companies tend to see increasing profits as consumer spending rises and operating costs stabilize or decline.
Limitations of Lagging Indicators
While lagging indicators are valuable for confirming trends, they have limitations. Because they change after the economy changes, lagging indicators do not provide timely information about economic conditions. By the time a lagging indicator confirms a trend, the economy may have already moved in a different direction. Therefore, lagging indicators should be used in conjunction with leading and coincident indicators to get a comprehensive view of economic performance.
