What Is a Leading Indicator and a Lagging Indicator?
What Is a Lagging Indicator?
A lagging indicator is a statistic that trails economic activity. It is used to give concrete data about the current outcomes by looking at the past performance of the economy. An example of a lagging indicator is the unemployment rate. Unemployment is a measurement of all people in the labor force who do not have a job and are actively looking for work, but cannot find it. While this statistic gives us information about how many unemployed individuals there currently are in the workforce, it does not provide an accurate picture of the economy until after the fact. This indicator lags behind current economic activity because employers wait to lay off employees until they already know that business is slow and certain workers will no longer be needed. They do not need to cut costs in order to prepare for their decisions and so they do not hire or fire based on expectations of future performance. As a result, the unemployment rate is not a good indicator of current economic conditions. However, it is still useful in the sense that it can be a basis for future decisions and can show us how the economy has changed over time.
How to Use the Lagging Indicator
As mentioned earlier, a lagging indicator can be useful in the sense that it tells us about how the economy has changed over time. For example, an increase in the unemployment rate might indicate that economic conditions have worsened because more people are now actively looking for work but cannot find it. This is because businesses are no longer hiring or employees are being laid off due to poor business conditions. This information can help policymakers make decisions about what actions they should take to improve the economy; however, it might not necessarily provide accurate information about whether or not their efforts were effective.
What Is a Leading Indicator?
A leading indicator is a statistic that anticipates economic activity. It will help provide information about the future based on data about current outcomes. It is a statistic that predicts future movements in the economy. It identifies current trends and provides information on where the economy is heading. Leading indicators are often used to make decisions about whether or not to invest in the economy. An example of a leading indicator is the index of consumer sentiment. The index of consumer sentiment is a survey that asks people how they feel about the current economic conditions and their willingness to spend money. This statistic anticipates future movements in the economy by looking at people’s attitudes about spending. If people are optimistic about the economy, they will be more likely to spend money. As a result, an increase in the index of consumer sentiment might indicate that the economy is improving because people are more willing to spend money.
How to Use the Leading Indicator
A leading indicator can be used to make decisions about whether or not to invest in the economy. For example, if the index of consumer sentiment is increasing, it might be a good time to invest in the economy because people are more likely to spend money. Alternatively, if the unemployment rate is decreasing, it might be a good time to invest in the economy because businesses are hiring more people.
Using Lagging and Leading Indicators Altogether
While lagging and leading indicators can be used separately to make decisions, they are often used together to get a more accurate picture of the economy. Economists can’t say for a fact that one is better than the other. Lagging indicators will give us a historical perspective of the economy while leading indicators will give us a glimpse into the future. When used together, lagging and leading indicators can help policymakers make decisions about what actions they should take to improve the economy.
The Bottom Line
Overall, lagging and leading indicators provide different types of information about the economy. Lagging indicators give concrete data about current outcomes by looking at past performance. Leading indicators give information about future movements in the economy by looking at current trends. Both types of indicators can be useful in making decisions about whether or not to invest in the economy.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.