NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A financial adviser is explaining different types of economic indicators to a client. Which of the following is considered a lagging economic indicator?
- AUnemployment rate
- BNew orders for durable goods
- CStock market returns
- DBuilding permits
Show answer & explanationAnswer & explanation
Correct answer: A. Unemployment rate
Lagging indicators reflect the economy's past performance and typically change after the economy has already begun to follow a particular pattern. The unemployment rate is a classic example, as employment trends usually shift after GDP changes.
Why the other options are wrong
- B. New orders for durable goods are a leading indicator, predicting future manufacturing activity.
- C. Stock market returns are generally considered a leading indicator.
- D. Building permits are a leading indicator, signaling future construction activity.
Lagging Indicator
An economic indicator that changes after the economy has already begun to follow a particular pattern or trend, confirming previous economic activity.
- Confirms economic trends previously observed.
- Examples: unemployment rate, corporate profits, average duration of unemployment.
- Useful for confirming the end of a recession or start of a recovery.
Memory trick: Lagging indicators 'lag' behind, confirming what just happened.