What are Lagging Indicators?
Lagging indicators are determinants that tend to become a measuring unit for the market whenever big economic, financial, or business events occur. These factors are assessed based on patterns observed following similar events that have occurred in the past. It lets users assess the fluctuations in the market, safety standards, business management principles, and other aspects likely to affect an economy’s progress.
The economic lagging indicators can be identified only after the event has occurred. Though it does not help identify future fluctuations, it ensures finding and confirming the similarity in the behavior or pattern of the element studied, given how they existed in the past.
Table of contents
- Lagging indicators refer to a series of economic activities, events, or developments that have already occurred in the past. It helps identify long-term trends or economic patterns.
- These indicators can be business indicators – used for performance assessment – or technical indicators – used to understand market price movements.
- Moving Averages, MACD, and Bollinger Bands are three types of lagging indicators.
- They cannot predict the future as the lagging indicators shift only upon major economic events.
Lagging Indicators Explained
Lagging indicators are a part of factors that help users assess the progress that different elements in the social sphere make. However, in trading, these indicators do not provide any clue about future price movements or do not help in analyzing past trends for future predictions. Instead, it can only be identified after the fluctuations or major economic activities have already occurred, affecting the asset prices. In short, lagging indicators in the stock market are determinants that let traders confirm the current price movements before taking a trade.
These indicators are broadly classified into two categories – business indicators and technical indicators. While the former act as the key performance indicator (KPI), helping businesses measure their performances, the latter is a delayed indicator that plays a vital role in trading, letting traders be aware of the changed asset prices or any current progress depicted in the trend.
Besides being an important metric in the trading and business sector, lagging indicators in safety also have a significant role. Based on past mishaps because of the lack of safety measures or non-maintenance of the required safety standards, these indicators help assess the safety works in progress, given the likelihood of an unfortunate event. The common safety measures adopted in the industries include safety training, audits, etc.
The lagging indicators definition can be better understood when the different types of them are known. The types of such indicators include:
#1 – Moving Averages (MA)
These are based on historical data. The signals to buy and sell are triggered when the price line crosses this average or two of these lines cross each other. The previous price points help calculate the moving average, which, as a result, keeps the current market price ahead of the MA.
#2 – The MACD Indicator
The Moving Average Convergence Divergence (MACD) is based on the MA principle and acts as a trend-following indicator. While using this tool, users have three components to deal with – two MAs, one the signal line and the other the MACD line, and a histogram. The only difference is that these indicators generate signals only when the two lines cross each other while the trend already remains in motion.
#3 – Bollinger Bands
These work on three components – a 20-day simple moving average (SMA) and two outer lines. The latter reflects the positive and negative standard deviations from the SMA. Using the same, the market volatility is measured. As the market turns volatile, the bands widen, and vice-versa.
Let us check out some lagging indicators examples in detail to understand the term better:
Example 1: Gross Domestic Product (GDP)
Gross domestic product is the total monetary value of all the finished goods and services produced within a country in a specific period. GDP data reflects figures quarterly as an annual percentage and reflects the country’s economic health.
As GDP increases, the economy gets stronger. Businesses adjust their inventory expenditures, asset investments, and credit policies based on this growth. Investors can manipulate their asset allocation Asset Allocation Asset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals. based on GDP performances. While investing in foreign countries, they can compare the GDP growth rates of different countries before making decisions. This is likely to help them in allocating their assets and investing in fast-growing economies.
The Federal Reserve uses GDP data while formulating its monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.. As a result, the governments can identify whether the nation’s economy is boosting or in recession.
For example, the United States went through its longest economic recessionEconomic RecessionEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. between December 2007 and June 2009. A simple thumb rule says that a recession is at the nation’s doors when GDP drops consecutively for two or more quarters.
Example 2: Unemployment Rate
These indicators effectively measure the labor force of a nation. In other words, the citizens who are not working do not contribute to the percentage of the total labor force. Employment opportunities become negligible when GDP is poor or shows signs of recession, and unemployment rates tend to increase aggressively.
Due to unemployment, there are no earnings. This, in turn, reduces consumption, thereby leading to decreased production and poor economic health or lower GDP. In addition, poor GDP also burdens the government with debts due to high spending on programs like unemployment benefits.
While lagging indicators assess the patterns, behavior, or trends based on delayed reflections, the non-lagging ones predict real-time price movements. The latter indicates leading indicators, which help check future market movements, and coincident indicators, which occur in real time and clear the current state of the economy. This is the reason why the cryptocurrency market witnesses a wide use of the leading determinants.
Frequently Asked Questions (FAQs)
The leading indicators are the ones that help analysts understand various patterns over time and predict future fluctuations in the market. On the other hand, the lagging indicators do not help understand past patterns or future fluctuations. Still, they have delayed indicators, which are only identified after the effect is reflected in the price movements. In short, the lagging indicators are used to confirm the current market status.
It is easy to identify these indicators as they are not defined by the past patterns to be studied further but only reflect the result after big economic and financial events affect the market.
While in a business sphere, these act as key performance indicators (KPI), the industrial units use them to understand the mishap trends that have occurred in the past because of the lack of safety measures. As a result, industries take measures to improve safety standards. In addition, these indicators are a must for trading in the stock market as they help traders confirm the current asset price before entering a trade.
This is a guide to what are Lagging Indicators. Here, we explain it with examples along with its types, and how it differs from non-lagging indicators. You can learn more about accounting from the following articles –