What Is the Composite Index of Lagging Indicators?
The Composite Index of Lagging Indicators is an index published monthly by the Conference Boardused to confirm and assess the direction of the economy’s movements over recent months.
- The Composite Index of Lagging Indicators is a composite economic indicator that lags behind changes in the overall economic performance of the U.S.
- Lagging indicators are useful to confirm the occurrence of economic turning points and assess the strength of the new trend.
- The Composite Index of Lagging in Indicators consists of seven components that measure how unemployment, unsold inventories, and underutilized labor pile up after the economy drops into recession and how interest rates, credit conditions, and prices change after general economic trends shift.
Understanding the Composite Index of Lagging Indicators
The Composite Index of Lagging Indicators, given that it measures the economic activities of previous months, is used as an after-the-fact way to help confirm economists’ assessments of current economic conditions. For this purpose, the Composite Index of Lagging Indicators is best used in conjunction with the Composite Index of Coincident Indicators and Composite Index of Leading Indicators.
A lagging indicator is a factor that changes after a particular pattern or trend in an economy has changed. Traders look at lagging indicators as a means to assess or confirm the strength of a given trend.
The composite index is made up of the following seven economic components, whose changes tend to come after changes in the overall economy:
- The average duration of unemployment measures the average number of weeks that unemployed individuals have been out of work. This series is inverted because periods of unemployment tend to lengthen during times of economic distress and shorten after an economic expansion gains strength.
- The ratio of manufacturing and trade inventories to sales is included to gauge business conditions because inventories tend to increase relative to sales when the economy slows.
- The change in labor cost per unit of output in manufacturing is included to indicate when production falls relative to labor costs after an economic downturn.
- The average prime rate charged by banks, which is used to determine rates for other types of loans. Changes in this rate tend to trail behind the general economic performance.
- The real (inflation-adjusted) dollar volume of outstanding commercial and industrial loans. This includes business loans held by banks and nonbank-issued commercial paper. This series lags behind the economy at business cycle turning points because demand for short-term commercial credit tends to rise during initial periods of economic stress and then fall as deflation sets in.
- The ratio of consumer installment credit outstanding to personal income provides a measure of indebtedness relative to income, which tends to rise after an expansion sets in and consumers become more confident in their ability to repay debts in the future.
- The change in the Consumer Price Index for services, which tends to lag behind other price indexes.
Lagging Indicators and the Bigger Picture
The Conference Board maintains several composite indexes tracking, including leading, coincident, and lagging indicators, to help offer an ongoing resource about the state of the U.S. economy.
“They are constructed by averaging their individual components in order to smooth out a good part of the volatility of the individual series,” according to The Conference Board. “Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity, and cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity.”