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What Is a Lagging Indicator?
Let me explain what a lagging indicator is: it's an observable or measurable factor that changes sometime after the economic, financial, or business variable it's correlated with has already changed. You can rely on lagging indicators to confirm trends and changes in those trends.
These indicators are practical for gauging the overall trend of the economy, as tools in your business operations and strategy, or as signals to buy or sell assets in financial markets.
Key Takeaways
- A lagging indicator changes after a change in the economic, financial, or business variable with which it is correlated.
- Some examples of lagging economic indicators include the unemployment rate, corporate profits, and labor cost per unit of output.
- Lagging technical indicators trail the price action of an underlying asset and are used to generate signals or confirm the strength of a trend.
- In business, lagging indicators reflect the impact of past management decisions or changes in business strategy.
- Lagging indicators differ from leading indicators, such as retail sales and the stock market, which are used to forecast and make predictions.
Understanding Lagging Indicators
A lagging indicator is a financial sign that becomes apparent only after a large shift has taken place. So, you see, lagging indicators confirm long-term trends, but they do not predict them. This is useful because many leading indicators are volatile, and short-term fluctuations in them can obscure turning points or lead to false signals.
If you're looking to confirm whether a shift in the economy has actually occurred, examining lagging indicators is one straightforward way to do that.
Economic Lagging Indicators
The U.S. Conference Board publishes a monthly index of lagging indicators along with its index of leading indicators. These include things like the average duration of unemployment, the average prime rate charged by banks, and the change in the Consumer Price Index for Services.
General examples of lagging indicators you should know about include the unemployment rate, corporate profits, and labor cost per unit of output. Interest rates can also be good lagging indicators 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 (BOT).
These differ from leading indicators, such as retail sales and the stock market, which you use to forecast and make predictions.
Business Lagging Indicators
In business, lagging indicators are a kind of key performance indicator (KPI) which measure business performance after the fact, such as sales, customer satisfaction, or revenue churn. They can be difficult or impossible to influence directly.
Because they are at least partially the outcome of business decisions and operations, they provide insight into the results achieved by how a business is being run. You can also track leading indicators that measure internal performance, such as customer engagement or employee satisfaction, which can be influenced more directly and lead to changes in lagging indicators.
Businesses use tools to measure, track, and compare various leading and lagging indicators of performance.
Technical Lagging Indicators
Another type of lagging indicator is a technical indicator that lags the current price of an asset, which occurs after a certain price move has already happened. One example is a moving average crossover.
Unlike other lagging indicators that compare different economic variables to each other, a technical indicator compares the value of a given variable to its own moving average over a given interval or other historical characteristics. 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 in asset trading is that a significant move may have already occurred, resulting in you entering a position too late. Note that similar technical approaches can be applied to economic indicators such as GDP or other measures of economic performance, as lagging indicators to confirm a change in trend.
What Is a Lagging vs. a Leading Indicator?
Leading indicators are forward-looking; they provide information about likely future outcomes. Lagging indicators are backward-looking and provide information about the effects of past inputs.
Is MACD a Leading or Lagging Indicator?
The moving average convergence/divergence (MACD or MAC-D) is a lagging technical indicator that is used in investing. It shows the relationship between two exponential moving averages for a security's price. Because this price information is historical data, MACD is a lagging indicator.
Is Inflation a Leading or Lagging Indicator?
Inflation is a lagging economic indicator. It is reported after prices have already risen, which means the data it uses is historical. This type of lagging indicator provides important information about the economy that is used to set public policy.
The Bottom Line
Lagging indicators are correlated to economic, financial, or business inputs. They are based on historical data, which means they change after a change has already happened in those inputs. This is different from leading indicators, which provide information about likely future changes.
Economic lagging indicators, such as the unemployment rate or inflation, provide information about past economic changes. Business lagging indicators usually provide information about how a change in management or strategy has impacted performance. Technical indicators are used in investing; they provide information about market trends, momentum, and the prices of securities.
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