Lagging Indicators vs Coincident Indicator
Lagging Indicators and Coincident Indicator are two Economic Indicators & Data concepts in AP Economics that students often mix up. Lagging indicators are economic data that change after the economy has already begun a trend, confirming its direction. Coincident indicators are series that rise and fall roughly in step with the overall economy, so they describe where the business cycle stands now. Here is how they compare side by side.
The unemployment rate and average duration of unemployment are classic examples, they keep worsening for a while after a recession ends. They are useful for confirming turning points rather than predicting them.
Coincident indicators move at about the same time as the broader economy, so they describe the present state of activity rather than the future or the past. The four standard series are nonfarm payroll employment, real personal income excluding transfer payments, industrial production, and real manufacturing and trade sales, which The Conference Board combines into a coincident index. Because the committees that date recessions want to know when activity actually peaked, these are the series they lean on alongside GDP. A coincident indicator still gets revised after publication, so the picture of the present keeps changing as fuller data arrives. The difference from a leading indicator is timing, not quality: coincident series are usually measured more accurately, they simply give no advance warning.
Lagging vs Coincident Indicators: Which One Can Date a Turning Point
| Lagging Indicators | Coincident Indicator | |
|---|---|---|
| Timing against real activity | Peaks and troughs arrive months after the cycle turns | Peaks and troughs arrive in roughly the same month |
| Can it date a recession | No, the turn is already history by the time it moves | Yes, official cycle dates are drawn from series like these |
| Typical members | Average duration of unemployment, unit labor costs, the prime rate, inventories relative to sales | Payroll employment, industrial production, real income less transfers, real manufacturing and trade sales |
| Why it behaves that way | Wages, contracts and credit terms reset on a schedule, not on the cycle | Measures activity as it happens, so nothing delays the response |
| Reading in the first months of a recovery | Often still getting worse | Already improving |
| Lag at troughs versus peaks | Longer at troughs, because firms wait to be convinced | None in either direction, by construction |
| Role in the coincident-to-lagging ratio | The denominator | The numerator, and the ratio turns before either index does |
Only a coincident series can say when the turn happened
Both categories are defined against the same reference, the level of aggregate real activity, and the difference between them is purely one of timing. A coincident series peaks in the month activity peaks and bottoms in the month it bottoms, which is exactly what makes it usable for dating. The researchers who mark the start and end of downturns work from monthly coincident series for that reason: payroll employment, industrial production, real income excluding transfers, real manufacturing and trade sales. A lagging series cannot do that job at any level of care. Suppose activity peaks in month 0 and bottoms in month 12. The coincident index turns down in month 0 and turns up in month 12. The lagging index might peak in month 5 and not bottom until month 18, so at every moment it is describing a state of the economy that has already been replaced. Notice what this implies for a written answer. If a question asks which series identifies the beginning of a recession, the lagging category is wrong no matter how reliable it is, and reliability is its whole selling point. Being almost never wrong and being usable for dating are separate properties, and a lagging series has only the first.
Lagging series are why the first year of a recovery does not feel like one
The lagging category explains a familiar complaint: output has been growing for three quarters and nothing feels better. The series that lag are the ones people live inside. The average time an unemployed person has been out of work keeps rising well past the trough, because the pool of long-term unemployed only shrinks after hiring has been strong for a while. Unit labor costs behave the same way, and the arithmetic is worth doing. Suppose output falls 8 percent while hours worked fall only 3 percent, because firms hold on to trained staff. Output per hour is then 0.92 divided by 0.97, about 0.948, a fall of roughly 5.2 percent. With hourly pay unchanged, the labor cost of each unit produced rises by about 5.4 percent, and it peaks after the downturn has ended rather than during it. Credit does the same, since loans outstanding to businesses keep shrinking into the recovery as banks tighten terms in response to losses already taken. Meanwhile the coincident series, payroll employment and industrial production, have already turned up. The gap between what the data say and what the recovery feels like is not a measurement failure. It is the definition of the two categories doing its work. See /macro/business-cycle for where these turning points sit.
Frequently asked questions
What is the difference between coincident and lagging indicators?
Coincident indicators turn at the same time as overall economic activity, so they show where the business cycle stands right now, while lagging indicators turn months afterwards and can only confirm a change that already happened. Payroll employment and industrial production are coincident. The average duration of unemployment, unit labor costs and the ratio of inventories to sales are lagging. Only the coincident group can be used to date the start or the end of a recession.
Why are lagging indicators useful if they arrive late?
Lagging indicators earn their place by being almost never wrong. A leading series produces false alarms, since anything sensitive enough to move early also moves when nothing follows, so forecasters wait for a lagging series to confirm that a turn was real before treating it as settled. Lagging data also feed the ratio of the coincident index to the lagging index, which tends to fall before either index turns, giving an early warning assembled entirely out of late-moving series.
Which indicators are used to date a recession?
Recession dates are drawn from monthly coincident series rather than from leading or lagging measures. The usual set covers payroll employment, industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales, since each moves with activity rather than ahead of or behind it. Quarterly real GDP matters as well, but marking the exact month of a peak or trough requires monthly data, which is why the coincident group carries the weight.
Live Business Cycle graph. Drag the curves, or open the full version.
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