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Phases of the Business Cycle |
There are four phases of the business cycle that gauge economic growth:
- Expansion
- Peak
- Recession
- Trough
The leading indicator system provides a basis for monitoring the tendency to move from one phase to the next. It assesses the strengths and weaknesses in the economy seeking clues to a hastening or slowing rate of growth in the economy along with key turning points from one phase of the business cycle to the next.
There are three indicators that help direct economists to predict and gauge the timing of the turning points in the economy:
- Leading
- Coincident
- Lagging
Leading indicators help anticipate the direction in which the economy is currently heading. Coincident indicators provide information regarding the current status of the economy – these indicators will change as the economy moves from one phase to the next and help indicate when the economy has moved into a new phase. Lagging indicators trail the market and change months after a downturn or upturn in the economy has arrived. Laggings indicators also help predict the duration of economic downturns or upturns.
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Average weekly hours, manufacturing (Common Leading Indicators) |
The average hours worked per week by production workers in manufacturing industries tend to lead the business cycle because employers usually adjust work hours before increasing or decreasing their workforce.
Average weekly initial claims for unemployment insurance:
The number of new claims filed for unemployment insurance are typically more sensitive than either total unemployment or unemployment to overall business conditions, and this series tends to lead the business cycle. Initial claims increase when conditions worsen (i.e. layoffs rise and new hirings fall).
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Building permits, new private housing units (Common Leading Indicators) |
| The number of residential building permits issued is an indication of construction activity, which typically leads most other types of economic production. |
S&P 500 stock market index (Common Leading Indicators) |
| The S&P 500 stock index reflects the price movements of a broad selection of common stocks traded on the New York Stock Exchange. |
Index of Consumer Expectations (Common Leading Indicators) |
| This index reflects changes in consumer attitudes concerning future economic conditions and is the only indicator in the leading index that is completely expectations based. |
Manufacturers’ new orders, consumer goods and materials (Common Leading Indicators) |
| Consumers primarily use these goods. The inflation adjusted value of new orders leads actual production because new orders directly affect the level of both unfilled orders and inventories that firms monitor when making production decisions. |
Manufacturers’ new orders, nondefense capital goods (Common Leading Indicators) |
| New orders received by manufacturers in nondefense capital goods industries are the producers’ counterpart to manufacturers’ new orders for consumer goods. |
Vendor performance, slower deliveries diffusion index (Common Leading Indicators) |
| This index measures the relative speed at which industrial companies receive deliveries from their suppliers. Slowdowns in deliveries increase this figure and are most-often associated with increases in demand for manufacturing supplies. |
Money Supply (Common Leading Indicators) |
| In inflation-adjusted dollars, this is the M2 version of the money supply. When the money supply does not keep pace with inflation, bank lending may fall, making it more difficult for the economy to expand. M2 includes currency, demand deposits, other checkable deposits, traveler’s checks, saving deposits, small-denomination time deposits and balances in money market funds. |
Interest rate spread, 10-year treasury bonds less federal funds (Common Leading Indicators) |
| This spread of difference between long and short rates is often called the yield curve. This series is constructed using the 10-year Treasury bond rate and the federal funds rate, an overnight interbank borrowing rate. |
Employees on nonagricultural payrolls (Common Coincident Indicators) |
| Includes full time and part time workers and does not distinguish between permanent and temporary employees. Because the changes in this series reflect the actual net hiring and firing of all but agricultural establishments and the smallest businesses in the nation, it is one of the most closely watched series for gauging the health of the economy. |
Personal Income (Common Coincident Indicators) |
| The value of the income received from all sources is stated in inflation-adjusted dollars to measure the real salaries and other earnings of all persons. Income levels are important because they help determine both aggregate spending and the general health of the economy. |
Index of industrial production (Common Coincident Indicators) |
| This index covers the physical output of all stages of production in the manufacturing, mining and gas and electric utility industries. |
Manufacturing and Trade sales (Common Coincident Indicators) |
| This index includes sales at the manufacturing, wholesale and retail levels. |
Average duration of unemployment (Common Lagging Indicators) |
| This series measures the average duration that individuals counted as unemployed have been out of work. Decreases in the average duration of unemployment invariably occur after an expansion gains strength and the sharpest increases tend to occur after a recession has begun. |
Average prime rate charged by banks (Common Lagging Indicators) |
| Although the prime rate is considered the benchmark that banks use to establish their interest rates for different types of loans, changes tend to lag behind the movements of general economic activities. |
Ratio of manufacturing and trade inventories to sales (Common Lagging Indicators) |
| This is a popular gauge of business conditions for individual firms, entire industries and the whole economy. Because inventories tend to increase when the economy slows and sales fail to meet projections, the ratio typically reaches its cyclical peaks in the middle of a recession. It also tends to decline at the beginning of an expansion as firms meet their sales demand from excess inventories. |
Consumer installment credit outstanding to personal income (Common Lagging Indicators) |
| This measures the relationship between consumer debt and income. Because consumers tend to hold off personal borrowing until months after a recession ends, this ratio typically shows a trough after personal income has risen for a year or longer. |
Change in labor cost per unit of output, manufacturing (Common Lagging Indicators) |
| Measure the rate of change in an index that rise when labor costs for manufacturing firms rise faster than their production (and vice versa). The index is constructed from various components, including seasonally adjusted data on employee compensation in manufacturing and seasonally adjusted data on industrial production in manufacturing. |
Commercial and industrial loans outstanding (Common Lagging Indicators) |
| This measures the volume of business loans held by banks and commercial paper issued by nonfinancial companies. The underlying data are complied by the Board of Governors of the Federal Reserve System. This measure tends to peak after an expansion peaks because declining profits usually increase the demand for loans. Troughs are typically seen more than a year later after the recession ends. |
Change in consumer price index for services (Common Lagging Indicators) |
This measures the rate of change in the service component of the consumer price index. Service sector inflation tends to increase in the initial months of a recession and to decrease in the initial months of expansion.
The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Terra Nova. This information is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. |
