Lagging Indicator

By
rjonesx
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What is a ‘Lagging Indicator’

A lagging indicator is a measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend. It is often a technical indicator that trails the price action of an underlying asset, and traders use it to generate transaction signals or confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move in the market generally occurs before the indicator can provide a signal.

Explaining ‘Lagging Indicator’

A lagging indicator is a financial sign that becomes apparent only after a large economic shift has taken place. Therefore, lagging indicators confirm long-term trends, but they do not predict them. Some general examples of lagging indicators include the unemployment rate, corporate profits and labor cost per unit of output. Interest rates are another good lagging indicator, since rates change as a reaction to severe movements in the market. Other lagging indicators are economic measurements, such as gross domestic product (GDP), the consumer price index (CPI) and the balance of trade. These indicators differ from leading indicators, such as retail sales and the stock market, which are used to forecast and make predictions.

Lagging Indicator Strategies

An example of a lagging indicator is a moving average crossover, because it occurs after a certain price move has already happened. Technical traders use a short-term average crossing above a long-term average as confirmation when placing buy orders, since it suggests an increase in momentum. The drawback of using this method is that a significant move may have already occurred, resulting in the trader entering a position too late.

Lagging Indicators in the Real World

Defaults of bonds and other debt types are a lagging indicator of the health of the debt market as a whole. On July 12, 2016, the amount of defaults for the first half of 2016 was found to be $50.2 billion, soaring past the $48.3 billion total defaults for all of 2015. This means the default rate for the first two quarters of 2016 was 4.9%. This is a lagging indicator that the bond market, specifically corporate debt, might be unstable in 2016.

Lagging Indicator FAQ

What is leading and lagging indicators?

A leading indicator shows business leaders how to produce desired results, and a lagging indicator measures current production and performance. A leading indicator changes easily and it’s hard to measure, while a lagging indicator is easy to measure but hard to change.

Why are lagging indicators important?

Lagging indicators show you what has happened, common examples are revenue, profit, and revenue growth. They can be identified easily, and can measure and compare against elsewhere in your industry, which makes them very useful.

What is the coincident index?

A coincident index is a single summary statistic that tracks the economy’s current state. The index is computed from several data series that move systematically with overall economic conditions.

What are the best leading economic indicators?

The Top Economic Indicators are: Real GDP (Gross Domestic Product). M2 (Money Supply). Consumer Price Index (CPI). Producer Price Index (PPI). Consumer Confidence Survey. Current Employment Statistics (CES). Retail Trade Sales and Food Services Sales. Housing Starts (Formally Known as “New Residential Construction”).

Why are leading indicators important?

Leading indicators are important to build a broad understanding of performance because they inform on possible future outcomes. Leading indicators are much more likely to be unique to your company, which makes them harder to build, measure, and benchmark.

Further Reading

  • The corporate social-financial performance relationship: A typology and analysis – journals.sagepub.com [PDF]
  • New Economic Indicators for Australia, 1949‐84 – onlinelibrary.wiley.com [PDF]
  • Predicting financial markets: Comparing survey, news, twitter and search engine data – arxiv.org [PDF]
  • New indexes of coincident and leading economic indicators – www.journals.uchicago.edu [PDF]
  • Business networks and innovation in selected lagging areas of the European Union: A spatial perspective – www.tandfonline.com [PDF]
  • The Ultimate Lagging Indicator – www.jstor.org [PDF]
  • Leading or lagging? Temporal analysis of safety indicators on a large infrastructure construction project – www.sciencedirect.com [PDF]
  • Financial development and bioenergy consumption in the EU28 region: Evidence from panel auto-regressive distributed lag bound approach – www.mdpi.com [PDF]

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