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 also 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.
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
Corporate earnings are a lagging indicator of the health of the business side of the economy. Companies in the S&P 500 Index generated earnings per share growth of 26% year-over-year in the first quarter of 2018, the sharpest increase since 2010, and 21% EPS growth in the second quarter (based on half of companies having reported). Much of the improvement has been driven by the benefits of tax reform. Thus, earnings growth has confirmed the positive effects lower tax rates are having on company profits. But given the historically high growth rates for the first half of 2018, this lagging indicator could also signal that earnings have peaked.
Coincident with earnings, U.S. GDP grew 4.1% year-over-year in the second quarter fo 2018, its fastest rate in four years. Coming on the heels of first-quarter GDP growth of 2.2%, the lagging indicator suggests the U.S. economy has broken out of its sluggish recovery.