Financial Industry Regulatory Authority (FINRA) Practice Exam

Which of the following is classified as a lagging indicator?

1. Increase in hours worked

2. Decrease in industrial production

3. Raw materials orders

4. Increase in consumer loans to personal income ratio

The correct answer is: Increase in consumer loans to personal income ratio

A lagging indicator is a metric that reflects the state of the economy after a change has occurred. It typically confirms trends and movements that have already started resulting in a more reactive indicator of economic performance. An increase in the consumer loans to personal income ratio is considered a lagging indicator because it provides information about consumer behavior in relation to their income levels after an economic shift has taken place. When consumers begin borrowing more relative to their income, it usually indicates that they are feeling the effects of economic conditions that may have already changed — such as increased costs of living or changes in employment status. In contrast, the other options represent leading or coincident indicators. An increase in hours worked can signal an impending growth phase as companies may hire more employees in anticipation of higher demand. Decrease in industrial production generally reflects current economic activity but can often be viewed as a coincident indicator, showing economic performance at the same time. Raw materials orders often serve as a leading indicator, as they indicate future production expectations based on current demand forecasts. Understanding the distinctions among these indicators aids in economic analysis and can influence decision-making in investment and policy.