Lagging indicator

Lagging indicator

A lagging indicator is an economic indicator that reacts slowly to economic changes, and therefore has little predictive value. Generally these types of indicators follow an event; they are historical in nature. For example, in a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly improved customer satisfaction is the result of initiatives taken in the past. Lagging indicators demonstrate how well an economy has performed in the past few months, giving economists a chance to review their predictions and make better forecasts.

The Index of Lagging Indicators is published monthly by The Conference Board, a non-governmental organization, which determines the value of the index from seven economic variables. These components tend to follow changes in the overall economy.

The components are:

1. The average duration of unemployment (inverted)

2. The value of outstanding commercial and industrial loans

3. The change in the Consumer Price Index for services

4. The change in labor cost per unit of output

5. The ratio of manufacturing and trade inventories to sales

6. The ratio of consumer credit outstanding to personal income

7. The average prime rate charged by banks

Economists' use the Index of Lagging Indicators to validate assessments of current economic conditions.


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