Lagging Indicator

What is Lagging Indicator
The lagging indicators are released by the Conference Board each month providing insight on financial developments in the past few months. As we discussed above, the economic impact of lagging indicators are felt by economic on a delayed basis. If a lagging indicator is rising, it is confirming a development which has already taken place in the past. Bank lending for example, is a leading indicator for recessions (that is, it precedes the commencement of a recession), but is a lagging indicator for recoveries (in other words, the indicators reflect the improvement after the recovery has begun, and is already being observed by market participants and analysts. Due to their delayed nature, lagging indicatos are used to confirm economic events, rather than predicting them.

1. Average Duration of Unemployment. this indicator measures the average of weeks an unemployed worker remains out of work during the past month. In other words, it is a way of measuring how tight or difficult the labor market is. If unemployed workers have to spend a lot of time looking for jobs, the implication is that businesses are unwilling to recommence hiring, and thus lack confidence in the future of the economy. This value is inverted to present a lower value in a recession, and a higher value in an expansion. Recovery in the labor market (or deterioration), is subsequent to recovery or deterioration in the general economic environment. As such this item is included as one of the lagging indicators.
2. Inventories to sales ratio. The stocking and liquidation of inventories reflects the expectations of managers. Inventories are lagging indicators in recessions (managers usually liquidate inventories a while after they are aware of deteriorating conditions in the economy, and falling consumer demand), and recoveries (managers beguin to replensih stock vigorously only after they are confident that the economy is firmly on the path to recovery. The inventory to sales ratio tends to rise into the middle of a recessions, then declining to low levels, and once again rising during recoveries as managers begin to restock. The Conference Board obtains the inventory-to-sales ratio from the GDP data released by the BEA (Bureau of Economic Analysis).
3. Average Prime Rate: The prime rate is simply the interest rate charged by banks to their mostly highly-rated customers with good credit scores and past performance. Banks adjust the prime rate immediately after the Federal Reserve declares its own changes to the funds rate. The prime rate is reflective of the Fed Funds Rate, which can be a leading or a lagging indicator depending on the competence of the governors leading the institution. In cases where the Boar of Governors fails to anticipate falling inflation, the rates will come down only in response to an actual recession. Conversely, if the bank cannot anticipate a recovery, the rates will begin to rise only after inflation has risen materially.
The Conference Board makes the assumption that central banks cannot anticipate economic events efficiently, and considers the prime rate a lagging indicator.
4. Commercial and Industrial Loans Outstanding: Banks adjust their lending policies in response to economic developments. Thus, at the beginning of a recovery, the lending policies of banks will remain restrictive, and only after there are credible signs that the economy is on a firm route to recovery will they begin to expand credit liberally. SAince commercial and industrial loans command higher interest rates in general, are more sizable, and often riskier, the adjustments in the category tend to lag economic recoveries by a year or more. If the cause of a recession is non-financial, banks begin to contract credit a while after the economy begins to contract. Thus the commercial and industrial loans category is usually a lagging indicator of recoveries and recessions.
5. Change in Labor Cost per unit of manufacturing output: This item peaks during recessions, as output usually shrinks much faster than labor compensation even in an open and capitalistic economy like the U.S. The data is gathered from various manufacturing industry resources, as well as BEA and the Federal Reserve.