What is a 'Lagging Indicator'
A lagging indicator is a measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend. It is often a technical indicator that trails the price action of an underlying asset, and traders use it to generate transaction signals or confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move in the market generally occurs before the indicator can provide a signal.
BREAKING DOWN 'Lagging Indicator'A lagging indicator is a financial sign that becomes apparent only after a large economic shift has taken place. Therefore, lagging indicators confirm long-term trends, but they do not predict them. Some general examples of lagging indicators include the unemployment rate, corporate profits and labor cost per unit of output. Interest rates are another good lagging indicator, since rates change as a reaction to severe movements in the market. Other lagging indicators are economic measurements, such as gross domestic product (GDP), the consumer price index (CPI) and the balance of trade. These indicators differ from leading indicators, such as retail sales and the stock market, which are used to forecast and make predictions.
Lagging Indicator Strategies
An example of a lagging indicator is a moving average crossover, because it occurs after a certain price move has already happened. Technical traders use a short-term average crossing above a long-term average as confirmation when placing buy orders, since it suggests an increase in momentum. The drawback of using this method is that a significant move may have already occurred, resulting in the trader entering a position too late.
Lagging Indicators in the Real World
Defaults of bonds and other debt types are a lagging indicator of the health of the debt market as a whole. On July 12, 2016, the amount of defaults for the first half of 2016 was found to be $50.2 billion, soaring past the $48.3 billion total defaults for all of 2015. This means the default rate for the first two quarters of 2016 was 4.9%. This is a lagging indicator that the bond market, specifically corporate debt, might be unstable in 2016.
Of the $50.2 billion in defaults, energy company defaults totaled $28.8 billion, which is a default rate of 15% within the industry. This is part of a lagging indicator, as the recent recovery in oil prices coincides with the price of junk bonds in the energy sector. Junk bond prices actually increased, and these prices were a lagging indicator of the increasing oil prices.