Lesson 4
Lagging Indicators
Use lagging indicators to confirm cycle phase, not to predict. When unemployment is peaking, leading indicators are often already turning up — that's your buy signal.
📊 Indicators mentioned in this lesson (click for details):
Lagging indicators confirm what ALREADY happened. Useless for prediction but valuable for understanding cycle phase.
The Major Lagging Indicators:
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Unemployment Rate (UNRATE): Counter-intuitively, it's LAGGING. Peaks AFTER recession starts, falls AFTER recovery is underway.
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CPI (Inflation): Responds to economic conditions with a lag.
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Corporate Profits (GAAP): Accounting profits reflect past performance.
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Loan Delinquencies: Default rates rise AFTER recession has started.
Why Lagging Indicators Matter:
They tell you DEPTH of damage and STAGE of recovery:
- Unemployment still rising while leading indicators turn up = early in recovery, big upside
- Unemployment has peaked and falling = recovery confirmed, less upside
- Unemployment very low = late cycle, be cautious
The Fed's Lag Problem:
The Fed watches lagging indicators (unemployment, inflation). They often tighten too late and ease too late. Understanding the lag helps you anticipate Fed errors.
Check your understanding
Lesson Quiz
Quiz Check
What are the key leading indicators for business cycle turns?
Quiz Check
The yield curve (T10Y2Y) is inverted, SLOOS shows 40%+ tightening, but ISM is still above 50 and employment is strong. Where are we in the cycle?