Lagging Indicator

Q: Marcus, a nervous client, asks his investment adviser whether the economy has truly entered a recession or if recent market volatility is just a temporary correction. The adviser reviews data showing two consecutive quarters of negative GDP growth, declining leading indicators from six months ago, and unemployment that has just begun to rise. Which statement would be most accurate for the adviser to make?

**A is correct.** Rising unemployment is a lagging indicator that confirms the recession is real and ongoing. Combined with two consecutive quarters of negative GDP and declining leading indicators from six months earlier, this provides strong confirmation that the economy is in recession. Defensive positioning remains appropriate. B is incorrect because GDP growth (or contraction) is a coincident indicator that moves with the economy, not a leading indicator. Two consecutive negative quarters meets the technical recession definition. C is incorrect because unemployment declining would confirm recovery is underway, not that the recession has ended. Unemployment is a lagging indicator that changes 6-12 months after the turning point. D is incorrect because leading indicators predict future changes but do not confirm current conditions. GDP (coincident) and unemployment (lagging) are used for confirmation.

Q: Which of the following is an example of a lagging economic indicator?

**C is correct.** Average duration of unemployment is a lagging indicator that confirms economic conditions well after changes have occurred. When unemployment duration increases, it signals the economy has been weak for an extended period. When duration decreases, it confirms recovery is underway. A (building permits) is a leading indicator that predicts future economic activity 6-12 months ahead. Rising permits signal future construction jobs and economic growth. B (stock prices) is a leading indicator that tends to anticipate economic changes. Markets often bottom before the economy recovers. D (consumer confidence) is a leading indicator that predicts future consumer spending and economic activity.

Q: An economist notes that GDP growth turned positive three months ago, the unemployment rate remains at 8.2%, and corporate profits are still declining year-over-year. Based on this data, what is the most likely current phase of the business cycle?

**B is correct.** Positive GDP growth (coincident indicator) that began three months ago signals the economy has moved past the trough and entered early expansion. However, the unemployment rate (8.2%) and declining corporate profits are lagging indicators that have not yet responded. This lag of 6-12 months is typical. They confirm the recession was severe but will improve as expansion continues. A (late contraction) is incorrect because GDP is already positive, indicating the trough has passed. C (late expansion) is incorrect because unemployment is still high and profits are declining. These conditions do not occur near peak. D (recession deepening) is incorrect because positive GDP growth means the economy is expanding, not contracting.

Q: All of the following are characteristics of lagging economic indicators **EXCEPT**

**C is correct (the EXCEPT answer).** Lagging indicators do NOT predict future economic turning points. That is the role of leading indicators (building permits, stock prices, consumer confidence). Lagging indicators confirm that changes have already occurred, providing validation rather than prediction. A is accurate: lagging indicators confirm trends 6-12 months after economic changes begin, which is why they are called "lagging." B is accurate: lagging indicators are the most stable because they smooth out short-term volatility and reflect sustained economic conditions. D is accurate: common lagging indicators include the unemployment rate, corporate profits, labor cost per unit output, and CPI for services.

Q: An investment research team analyzes economic data showing declining building permits, rising stock prices, a falling unemployment rate (from 7.2% to 6.8%), and increasing corporate profits. Which of the following statements about these indicators are accurate? 1. The falling unemployment rate is a lagging indicator confirming past economic strength 2. Rising stock prices are a leading indicator suggesting future economic growth 3. Declining building permits are a lagging indicator showing the economy is weakening 4. Increasing corporate profits are a lagging indicator confirming the expansion

**C is correct.** Statements 1, 2, and 4 are accurate. Statement 1 is TRUE: The unemployment rate is a lagging indicator that confirms economic conditions from 6-12 months earlier. A falling unemployment rate (from 7.2% to 6.8%) confirms the economy has been strengthening for several months. Statement 2 is TRUE: Stock prices are a leading indicator that tends to anticipate future economic changes. Rising stock prices suggest investors expect continued or improving economic growth ahead. Statement 3 is FALSE: Building permits are a LEADING indicator (not lagging) that predict future economic activity. Declining permits suggest future construction slowdown, which could indicate economic weakness ahead. However, this conflicts with the rising stock prices, suggesting mixed signals. Statement 4 is TRUE: Corporate profits are a lagging indicator that confirm economic trends after they occur. Increasing corporate profits confirm that the economy has been in expansion mode, with strong demand and pricing power for businesses.

Economic Factors High Relevance

Economic metrics that confirm trends and changes in the economy AFTER they have already occurred, typically with a 6-12 month delay. Common lagging indicators include the unemployment rate, corporate profits, labor cost per unit output, and CPI for services. These are the most stable of the three indicator types and are used to verify economic turning points.

Example

During the 2008-2009 financial crisis, GDP began declining in late 2007, but the unemployment rate (a lagging indicator) did not peak until October 2009, nearly two years later. This confirmed that the recession had ended and recovery was underway, even though unemployment remained elevated.

Common Confusion

Students often confuse lagging indicators with leading indicators, thinking lagging indicators are useless because they arrive "too late." In reality, lagging indicators are critical for confirming that economic changes have actually occurred and are not just temporary fluctuations.

How This Is Tested

Identifying which economic metrics are lagging indicators versus leading or coincident indicators
Understanding the confirmation role of lagging indicators in verifying business cycle turning points
Recognizing that lagging indicators typically change 6-12 months after economic shifts begin
Analyzing scenario-based questions where advisers use lagging indicators to confirm recession or recovery
Distinguishing between the stability of lagging indicators versus the volatility of leading indicators

Regulatory Limits

Description	Limit	Notes
Typical lag time after economic changes	6-12 months	Lagging indicators confirm trends well after the initial economic shift, making them the most stable but least predictive

Example Exam Questions

Test your understanding with these practice questions. Select an answer to see the explanation.

Question 1

Marcus, a nervous client, asks his investment adviser whether the economy has truly entered a recession or if recent market volatility is just a temporary correction. The adviser reviews data showing two consecutive quarters of negative GDP growth, declining leading indicators from six months ago, and unemployment that has just begun to rise. Which statement would be most accurate for the adviser to make?

Question 2

Which of the following is an example of a lagging economic indicator?

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Question 3

An economist notes that GDP growth turned positive three months ago, the unemployment rate remains at 8.2%, and corporate profits are still declining year-over-year. Based on this data, what is the most likely current phase of the business cycle?

Question 4

All of the following are characteristics of lagging economic indicators EXCEPT

Question 5

An investment research team analyzes economic data showing declining building permits, rising stock prices, a falling unemployment rate (from 7.2% to 6.8%), and increasing corporate profits. Which of the following statements about these indicators are accurate?

1. The falling unemployment rate is a lagging indicator confirming past economic strength
2. Rising stock prices are a leading indicator suggesting future economic growth
3. Declining building permits are a lagging indicator showing the economy is weakening
4. Increasing corporate profits are a lagging indicator confirming the expansion

💡 Memory Aid

Think of lagging indicators as the rearview mirror while driving: They show you where you've BEEN, not where you're GOING. Unemployment rate and corporate profits are like checking the mirror to confirm "Yes, we really did go through that rough patch" or "Yes, the road has been smooth lately." Most stable and reliable for confirmation, not prediction.

Related Concepts

This term is part of this cluster:

📊 Macro Economy

Lagging Indicator