Here is a business cycle. The rate of growth in the economy, which is measured by GDP or output, is on the y-axis, and time is on the x-axis.
You can see that it is normal for the economy to go through periods of growth and contraction.
Notice the period of expansion leading into a peak, followed by a contraction, where GDP or output falls. After the period of contraction, we hit a trough, and the whole cycle starts over again.
If the contraction lasts six months or longer, most economists agree that we are in a recession.
Most people are concerned about things like the unemployment rate and inflation in the economy.
Economists use many different kinds of data to help them do the following:
For the purposes of this tutorial, we will focus on what has just occurred in the economy.
Economists study economic indicators, which give them an overall view of the economy at any given point in time.
The three different categories of indicators are:
Today we are discussing lagging indicators, which are trends, patterns, or situations that provide a clear indication of where the economy has been.
We are taking a look back at where we've been.
EXAMPLEExamples of lagging indicators are the unemployment rate, the CPI, or Consumer Price Index, and consumer credit, which we will discuss in further detail.
The unemployment rate is measured by the Bureau of Labor Statistics, or BLS.
Now, because it it impossible for the BLS to know every single person in this situation--because not everyone files for unemployment--the government conducts a monthly sample survey.
It is a sample survey because if we wanted to try to interview every single person in our country, as we do every 10 years with the census, it would take too many resources and time.
The Current Population Survey, or CPS, is what the BLS conducts.
This survey includes about 60,000 households, which is approximately 110,000 individuals, and it is supposed to be representative of the entire U.S. population.
This means that they will be sampling households all over the country-- covering various cities, rural populations, more urban settings, and different demographics, for instance.
The interviewers ask questions about the household members' labor force activities in that month and people are classified in one of three ways:
So, why is unemployment is a lagging indicator?
To understand this, let's talk about how it can be related to cyclical unemployment.
Whenever there is an increase in demand for their good or service, which suggests that we are in an expansionary period, businesses respond to that upturn in the economy.
They will notice the increase in demand for their good or service, and will hire more workers and produce more.
This is when our unemployment rate will fall.
However, the opposite situation occurs when firms notice a decrease in demand for their good or service, when the economy enters a period of contraction.
Then, they respond to the downturn in the economy by laying off workers and producing less--and the unemployment rate will rise.
Structural unemployment, you may recall, is due to the changing structure of our economy.
Businesses respond to new production techniques available in their industry, new technologies, and they adopt more efficient methods of production.
Sometimes this involves laying off workers, as their skills no longer match the ones required for the new methods, or technology is simply replacing some of the workers.
This chart shows the unemployment rate over the last several decades.
Notice that the areas in gray are recessions.
You can see that during those recessions, the unemployment rate is on the rise.
Although the unemployment rate is studied in macroeconomics, because it describes what is going on in the overall economy, microeconomics might also study its impact.
A microeconomist might be interested in how it is impacting certain industries--again, because of that structural unemployment--or how it will impact specific groups of individuals.
The Bureau of Labor Statistics also measures the rate of inflation in our economy.
Inflation is, quite simply, an increase in the overall price level. This happens not just when the price of one thing goes up, but when many prices increase simultaneously.
Economists use price indexes, which are measurements that show how the average price of a standard group of goods changes over time.
The most common is the CPI, or Consumer Price Index.
Again, it would not be feasible to quickly measure the price of every single good and service in our economy. Therefore, economists use a market basket, which is a bundle of goods meant to represent the "market basket" purchased monthly by the typical urban consumer.
Here is an example of some of the categories in this market basket.
|Food and drinks||Cereals, coffee, chicken, milk, restaurant meals|
|Housing||Rent, homeowners' costs, fuel oil|
|Apparel and upkeep||Men's shirts, women's dresses, jewelry|
|Transportation||Airfares, new and used cars, gasoline, auto insurance|
|Medical care||Prescription medicines, eye care, physicians' services|
|Entertainment||Newspapers, toys, musical instruments|
|Education and communication||Tuition, postage, telephone services, computers|
|Other goods and services||Haircuts, cosmetics, bank fees|
As you can see, this includes a list of the categories and examples of common items that most people would need to pay for in a given month, which are all things that would be measured in the index.
So, why is this a lagging indicator?
Well, it takes some time for prices to adjust to economic conditions.
As businesses see a drop-off in demand for their products, they will eventually lower their prices in order to try to sell more.
As businesses see an increase in demand, they will raise prices, because they realize that they can and people will still buy their products.
Again, even though the CPI measures price changes overall in the economy--which is very much macroeconomics--microeconomics might study:
EXAMPLEFor example, did the automobile industry experience the same inflation rate as other goods this year?
EXAMPLEDid the price of luxury goods, for example, change more or less than other goods?
The Federal Reserve publishes a monthly report on consumer credit.
They survey banks, finance companies, credit unions, etc.--anyone who is issuing consumer credit.
This estimates changes in the amount of loans that consumers have. I
It also looks at interest rates for different types of loans, such as car loans, credit cards and bank loans, or any kind of consumer loan.
Once again, why would this be lagging?
Well, people borrow money to make big purchases
It takes some time to impact people's behaviors with these big purchases; you don't go out and buy a house overnight simply because the economy improved--it takes some time.
The borrowing may show the largest increases when the economy is already coming out of a recession, rather than during the worst of it.
Microeconomics might be interested in studying consumer credit in specific industries, such as:
This graph shows, for example, the different interest rates over time in the car industry, so you can see the relationship with periods of recession in the economy.
Source: Adapted from Sophia instructor Kate Eskra.