Lagging economic indicators include consumer inflation for services (as measured by the CPI), the cost of labor, the length of employment (specifically, the measure includes the inverse of the average length of employment), the average prime interest rate that banks are charging, the total value of industrial and commercial loans, the size of consumer credit (as compared to personal income) and the ratio of inventories to sales.
OK, back up. Here’s the economy: Kind of a roller coasters ups and downs but generally goes up, over time, anyway. More people. More demand for toothpicks. More bed sheets. More hair growth formula. More buyers of a one-bedroom with a view of another one-bedroom with a view of...whatever.
Wall Streety people and economists, yeah, those guys, are always trying to figure out where we are in these roller coaster cycle ups n’ downs. Are we here? Are we here? Are we here?
Yeah, very Carmen SanDiego.
So a leading indicator is basically the canary in the mineshaft and if you don't know the term PETA stopped this. But it used to be that miners would bring canaries with them into mine shafts because canaries are, if they live to tell the tale, extremely sensitive to gas. Uh, different gas.
And when there would be any kind of harmful leak, like from gas lanterns, or from diesel engines, or from fissures in the earth, the canary would die, or at least stop singing. And then the miners would skedaddle it out of there.
So the canary was the leading indicator of a deadly gas leak and miners would follow it.
Investors are always anxious to figure out what leading indicators are saying about where the economy is going. Investors kind of live two quarters into the future... and if they believe we’ll have a meaningful slowdown in the economy, they’ll usually begin selling well ahead of then.
That is, the economy, or belief in economic growth, is a leading indicator - often of where the broader stock market is heading. One famous canary no longer really in use are help wanted lines in the newspaper. And yes, once upon a time, those things were on paper, way before the founders of Glassdoor, Indeed and the others were even invented.
So help wanted lines were a leading indicator. If they were shrinking, the economy was likely to be softening as demand for incremental new hires was dissipating; And it went the other way too.
Today, we look more often at things like bond yields - albeit with skepticism, because the Fed can raise and lower bond rates for a variety of reasons -- defending the dollar internationally - like, they’d raise rates to do that…
Or with political back pressure, they might lower them to give the stock markets a chance to waft upwards. Lower rates mean lower bond yields, thus making things like equity dividends a much more attractive means of raising cash to pay the rent.
New housing starts are another big leading indicator - volatile space - but if the smart people of the world are greenlighting loans for builders to build new homes, then a whole lot of people believe that the demand will be there for those homes a year or two later.
Ok so those are leading indicators.
What are lagging ones? And why would we even care about a lagging indicator?
Like a lagging indicator of your death is worms eating your body. And you, really just not caring. Well, lagging indicators really serve as a truth telling mechanism to see if we got our leading indicators right.
That is, a lagging indicator might tell us that we’ve just finished a big economic boom, and are really 5 quarters into a sort of soft recession, as we see declines in profits from gate fees at Disneyland and Disney world and we might see unemployment rates going up at an active clip, and we might see interest rates following, with the gov hoping to stimulate economic activity again.
All of these indicators, however, only exist in a weird kind of vacuum, because so many cities and even states have their own ecosystem, economically speaking. The planet called Silicon Valley over the last couple of decades, has generally grown like a bamboo shoot on hot sweaty days, with only blips of economic cyclicality.
Other areas, like Detroit, can’t seem to grow no matter how much stimulus the Feds apply.
The key takeaway, as with any economic indicator, is that real investor-type Wall Street people really don’t care all that much about what the economy is doing when they put money to work for their clients, and after all those economists with PhDs need at least something to do with their time.