Recognition Lag

The dreaded recognition lag. It’s dreaded because, if it’s long, it’s, um...embarrassing.

Recognition lag is the time elapsed between two points in time. The first is the event: either a stampede of bulls or bears (a market shock one way or the other). The second point in time is how long it takes central bankers, economists, and the government to notice.

It’s like if you sat down, and slowly noticed a wet feeling on your heinie. What is that? You just sat in a mystery liquid. How long did it take you to notice? That’s your recognition lag, if the liquid-on-pants situation is akin to a personal recession. It’s okay...you and the markets always bounce back eventually, right?

So...what’s a non-embarrassing recognition lag? It depends on how severe the economic shock was. The bigger it is, the faster you’d expect someone to notice. If it’s ambiguous and vague, it might take a while to notice. Anywhere from days to months.

For market crashes, it’s more likely days. But if it’s recognized from surveys and economic indicators being measured by government agencies, it might take months. These surveys have to be distributed, answered, collected, analyzed, and reported. All that takes time. By the time it gets in the right hands, it will have been a while since the shock occurred. What’s worse is that it might take a few rounds of surveys to really notice or cement a trend, or the relevant survey might only come out once a quarter. That’s why most recognition lags are around three to six months.

The longer it takes for us to notice and confirm something extreme is happening, the longer it takes a government (like the central bank) to react with a plan.