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April 24, 2018 

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LAW OF INCREASING OPPORTUNITY COST: The proposition that opportunity cost, the value of foregone production, increases as more of a good is produced. This "law" can be seen in the production possibilities schedule and is illustrated graphically through the slope of the production possibilities curve. It generates the distinctive convex shape of the curve, making it flat at the top and steep at the bottom.

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LAGGING ECONOMIC INDICATORS:

Seven economic statistics that tend to move up or down a few months AFTER business-cycle expansions and contractions. Most importantly, these measures indicate peak and trough turning points about three to twelve months after they occur. Lagging economic indicators are one of three groups of economic measures used to track business-cycle activity. The other two are coincident economic indicators and leading economic indicators.
Lagging economic indicators provide monthly tracking of business-cycle activity. They give consumers, business leaders, and policy makers an idea about where the economy was a few months back. When the economy rises today, then lagging indicators are likely to rise in the coming year. And when the economy declines this month, then lagging indicators are likely to decline in three to twelve months.

The actual measures used as lagging economic indicators are collected by several different government agencies and private groups, including the Bureau of Labor Statistics and the Federal Reserve System. These measures are then compiled by economists and number crunchers at The Conference Board.

Seven Measures

The seven lagging economic indicators that generally indicate business-cycle peaks and troughs three to twelve months after they actually occur are: (1) labor cost per unit of output in manufacturing, (2) the average prime interest rate, (3) the amount of outstanding commercial and industrial debt, (4) the Consumer Price Index for services, (5) consumer credit as a fraction of personal income, (6) the average duration of unemployment, and (7) the ratio of inventories to sales for manufacturing and trade.

Each of these seven individual indicators is useful in its own right, but when combined as a composite measure, even greater insight into the business-cycle activity is achieved.

How They Track

Lagging Indicators
Business Cycle
The exhibit to the right can be used to illustrate how lagging economic indicators relate to the official tracking of business-cycle peaks and troughs.

First, take note of the somewhat jagged red line displayed in the exhibit. It provides a hypothetical tracking of real gross domestic product over several months. Two peaks are evident, labeled with P. One trough is displayed as well, marked by T.

A click of the [Lagging] button reveals a thin purple that rises and falls a few months after real GDP rises and falls. The purple lagging indicator line parallels movements of the red real GDP line, but it does so after the fact.

Looking Back

Lagging indicators document business cycle turning points several months after they have occurred. There might be some question about the usefulness of this information. Of what good is knowing the state of the economy several months AFTER the fact? In the wacky world of economic number crunching, lagging indicators actually do have a useful role. In particular, lagging indicators are needed to "finalize" the most recent contraction. Lagging indicators must mark the trough of the previous contraction before leading indicators can signal the peak of the current expansion and the beginning of the next contraction. In other words, the next recession cannot start until the lagging indicators certify that the last one is over.

Practical and Theoretical

Lagging indicators are chosen primarily because they have been shown to work, to lag business cycle peaks and troughs. However, they also draw on theoretical cause-and-effect relations, capturing events that surface later on in the complex cause-and-effect process that underlies business cycles.

The Consumer Price Index, for example, is a lagging indicator that captures a late cause-and-effect connection. Consumer prices are slow to change in response to aggregate economic activity. These prices change as a result of other events occurring. Consumer prices, for example, are likely to rise only after the economy has passed a business-cycle trough and moved headlong into a robust expansion. Alternatively, consumer prices are likely to fall only several months after the economy has reached a business-cycle peak and dropped into a contraction.

The state of the economy will inevitably have an impact on consumer prices, just not immediately. It takes time for the complex series of cause-and-effect links to show up in the Consumer Price Index.

The Other Two

The other two groups of economic indicators--leading and coincident--have perhaps even more important roles to play in tracking business cycles.
  • Leading: These are ten measures that generally indicate business-cycle peaks and troughs three to twelve months before they actually occur. Leading economic indicators predict where the economy is headed in the near future, providing enormous assistance to consumers, business leaders, and policy makers who need to anticipate and plan for future economic conditions.

  • Coincident: These are four measures that indicate the incidence of business-cycle peaks and troughs at the time they actually occur. Coincident economic indicators are a primary source of information used to document "official" business-cycle turning points.

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Recommended Citation:

LAGGING ECONOMIC INDICATORS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: April 24, 2018].


Check Out These Related Terms...

     | business cycle indicators | leading economic indicators | coincident economic indicators |


Or For A Little Background...

     | business cycles | business cycle phases | potential real gross domestic product | full employment | expansion | contraction | peak | trough |


And For Further Study...

     | investment business cycles | political business cycles | demand-driven business cycles | supply-driven business cycles | Bureau of Labor Statistics | Conference Board, The | unemployment | inflation | Consumer Price Index |


Related Websites (Will Open in New Window)...

     | Bureau of Labor Statistics | The Conference Board |


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