The best way to use lagging indicators is in conjunction with the two other types. The first are leading indicators. These include stock prices, manufacturers’ orders for durable goods, and interest rates. They predict new phases in the business cycle. These indicators are better understood with some foundational knowledge of what causes the business cycle. You should also look at coincident indicators, such as gross domestic product and employment. They tell you what is happening right now. Most people don’t bother looking at lagging indicators. That’s a mistake. They help you make sure you are reading the trends right. That way you’ll know that the economy has headed into a recession and when it’s over.
Top Three Lagging Indicators to Watch
The Dow Jones Transportation Average is a useful lagging indicator. It tracks the stock performance of companies that ship our nation’s goods. Once manufacturers fill the durable goods orders, they have to ship it to customers. There’s a lag between the order and the shipments. If the Transportation Index rises, it means customers haven’t canceled their orders. That confirms the movements of the Durable Goods Order Report, a leading economic indicator. Unemployment is a lagging indicator. Once people start to lose their jobs, the economy has already begun declining. The last thing employers want to do is let people go. Unemployment will also continue to rise even after the economy has started to improve. Companies wait until they believe the economy has recovered before they start hiring again. Another lagging indicator is the Consumer Confidence Index. Most people don’t feel that the economy has changed until after it already has. People base their feelings about the economy on how easy it is to find jobs. It doesn’t become difficult to find work until after the economy has turned negative.
Index
The U.S. Conference Board established the Index of Lagging Indicators for the federal government. This non-profit agency publishes the index monthly. It weighs seven lagging indicators to create the index. The Board used the indicators established by The National Bureau of Economic Research. NBER’s research identified them as the ones that best-confirmed business cycle phases. The chart below shows the components of the Conference Board’s Lagging Indicator Index, broken down by percentage.
List
Here’s a list of the Conference Board’s indicators. It’s the most comprehensive list of useful indicators that economists follow. A quick summary explains why each is useful and their weights in the index.
