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Employment is NOT a lagging indicator, although duration of unemployment IS. The Conference Board, a not-for-profit economic study organization, publishes three popular indexes: 1) the Leading Economic Index (LEI), which foretells turning points in the economy before we move into or out of recessions, 2) the Coincident Economic Index, which measures current economic conditions, and 3) the Lagging Economic Index, which changes direction following the others.

There are two employment indicators that are incorporated into the LEI, namely Initial Claims for Unemployment Insurance (inverted), and Average Weekly Manufacturing Hours. Like other leading indicators, we do not normally recognize these things as obvious improvements in the economy. After all, if over 500,000 workers file claims for unemployment insurance, as was the case this week, this is still a relatively large number and the fact that it is much lower than was the case a few weeks and months ago does not mean that the economy is improving. But it DOES mean (with history as our guide), along with improvement in the other leading indicators, that the economy is going to improve soon.

What about total employment - the actual number of workers on payrolls? That is the figure most people relate to as a measure of the health of the economy. That is not a lagging indicator, either. In fact, it is a Coincident Indicator. The first Friday of every month the Bureau of Labor Statistics of the U.S, Department of Labor releases monthly data showing nonfarm payrolls. This figure is an important measure of how the economy is doing right now. It is one of the Coincident Indicators tracked by the Conference Board. In addition, it is one of the four indicators examined by the National Bureau of Economic Research (NBER), which is widely recognized as the group responsible for determining the dates of the beginning and end of recessions. The other three indicators that the NBER considers are sales, income and industrial production.

Employment typically rises when recessions end. However, in our most recent recovery from recession, 2001, employment did not rise until over a year after the NBER called the end of that recession based on improvement in the other three indicators. Indeed, that period of time was dubbed, "The Jobless Recovery." That lag in employment was unusual and it did not knock Nonfarm Payroll Employment off its perch as one of the Conference Board's Coincident Indicators. And Employment remains one of the four indicators considered by the NBER in fixing the ending date for the current recession.

The Unemployment Rate has no official status as part of any broad index of economic conditions. Observers have pointed out problems in drawing conclusions from changes in the employment rate. For one, as labor market conditions worsen, unemployed workers may become discouraged and stop seeking jobs. Their dropping out of the labor force can make the unemployment rate fall, disguising worsening conditions. Conversely, as the economy improves, discouraged workers tend to become optimistic as they hear reports of hiring, then enter the labor force where they add to the unemployment rate while they actively seek work. These leakages, plus changes in the calculation of unemployment over time, have brought much criticism to the use of the Unemployment Rate as an economic indicator. The Unemployment Rate does tend to lag the ups and downs of the economy cycle.

There is one additional measure of unemployment that is a Lagging Indicator, as defined by the Conference Board: Average Duration of Unemployment (inverted). This measure looks at people who have recently found jobs and tells us the average length of time they had been unemployed.

What are the labor market indicators telling us now? Of the Leading Indicators, Initial Claims for Unemployment Insurance peaked in March and the four week moving average of claims has fallen steadily since April. Average Hours Worked in Manufacturing began a small improvement in June. These indicators and the overall LEI point to an early end to the recession, and the recovery may well be underway, already. Nonfarm Payrolls, a Coincident Indicator, has continued to deteriorate in recent months, but we are well past the peak in net job losses. This year's massive declines in manufacturing inventories argue for a pick-up in factory hiring, as has recently occurred in the auto and steel industries. Thus, the outlook is becoming more positive for gains in Average Weekly Manufacturing Hours this month and next, soon to be followed by gains in nonfarm payrolls during the fourth quarter.

The Unemployment Rate and the Average Duration of Unemployment have continued to worsen, and they can be expected to improve only after the economic recovery is well underway. To summarize: Average Duration of Unemployment and the unemployment rate are lagging indicators, Nonfarm Payrolls is a coincident indicator and Initial Claims for Unemployment Insurance and Average Manufacturing Workweek are leading indicators. The last two of these have already turned for the better. The next one to improve, as the economy recovers, likely will be Nonfarm Payroll Employment.

Source: Is Employment a Lagging Indicator?