What Are Lagging Indicators?
A lagging indicator is an observable or measurable factor that changes sometime after the economic, financial, or business variable it is correlated with changes. Lagging indicators confirm trends and changes in trends.
Lagging indicators can be instrumental in understanding the broader economy, guiding business operations and strategy, or signaling asset buy or sell opportunities in financial markets.
Key Takeaways
- A lagging indicator changes after a change in the correlated economic, financial, or business variable occurs.
- Examples include the unemployment rate, corporate profits, and labor cost per unit of output.
- Lagging technical indicators follow the price action of an underlying asset to generate signals or confirm trend strength.
- In business, these indicators reflect past management decisions or strategy changes.
- Lagging indicators differ from leading indicators, which are used to forecast and make predictions.
Comprehending Lagging Indicators
A lagging indicator is a financial sign that surfaces after a significant shift. These indicators confirm long-term trends but do not predict them, useful in verifying actual shifts in the economy, unlike the volatile leading indicators which may provide false signals.
Economic Lagging Indicators
General examples of lagging indicators include the unemployment rate, corporate profits, and labor cost per unit of output. Interest rates can serve as lagging indicators as they change in response to major market shifts. Other examples include:
- Gross Domestic Product (GDP)
- Consumer Price Index (CPI)
- Balance of Trade (BOT)
These indicators confirm changes in the economy unlike leading indicators, such as retail sales and the stock market, which forecast future trends.
Business Lagging Indicators
In the business arena, lagging indicators are a type of key performance indicator that measure performance after the fact. Examples include sales, customer satisfaction, and revenue churn. These indicators, derived from business decisions and operations, provide insights into the outcome of existing business strategies.
Tools for Business Insights
Business intelligence tools such as dashboards are beneficial for tracking both leading and lagging indicators, thereby offering a comprehensive performance overview.
Technical Lagging Indicators
A key type of lagging indicator in the realm of technical analysis is one that follows the prevailing price of an asset. Examples include moving average crossovers. These indicators compare a variable’s value to its moving average over a specified interval, facilitating confirmations for traders based on past price movements.
Lagging vs. Leading Indicators
Leading indicators are forward-looking and help in forecasting probable future outcomes. In contrast, lagging indicators are backward-looking, providing insights into the effects of past actions.
FAQs
Is MACD a Leading or Lagging Indicator?
The Moving Average Convergence/Divergence (MACD) is a lagging technical indicator that shows the relationship between two exponential moving averages of a security’s price, highlighting it with historical data.
Is Inflation a Leading or Lagging Indicator?
Inflation is a lagging economic indicator, reporting after prices have risen and thus using historical data. It offers crucial information for setting public policies.
Conclusion
Lagging indicators serve as essential tools correlated with economic, financial, or business inputs, based on historical data. They help register the changes after these inputs, aiding in confirming trends. Economic lagging indicators like the unemployment rate or inflation provide insights into past economic changes, while business lagging indicators shed light on the impact of management decisions and strategies. In the investment arena, technical indicators guide traders in capturing market trends and momentum.
Related Terms: leading indicators, key performance indicators, moving averages, economic trends, technical indicators.
