Reference no: EM133066957
Understanding Leading Indicators
Economists work hard to forecast the business cycle, and chief among their tools are leading indicators: economic variables that economists use to try to predict future trends in the business cycle. The stock market is a well-known leading indicator. However, forecasting the business cycle-let alone implementing the right fiscal response at the right time-is not a perfect science.
One successful group is the Conference Board. Their widely respected U.S. Leading Economic Index is a composite index (a measurement composed of more than one item) consisting of many leading indicators, described in the table below.
Directions: Consider each indicator. Complete the table by answering the questions.
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Indicator
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Description
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Does a change anticipate expansion or a contraction?
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Average weekly
hours in
manufacturing
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1. The average number of hours worked per week by factory workers increases.
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Average weekly
claims for
unemployment
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2. The average number
of new claims for unemployment benefits decreases.
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Manufacturers' new
orders for consumer
goods
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3. Orders received by
manufacturers for
consumer goods decreases.
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Vendor performance
index
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4. How quickly suppliers
deliver supplies to
manufacturers decreases.
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Manufacturers' new
orders for capital
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5. Orders received by
manufacturers for capital goods (machines), increases.
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New housing
permits
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6. The number of new
housing permits issued by local governments decreases.
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Stock prices
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7. The S&P 500 stock index (Stock Market) is steadily rising.
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Money supply
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8. The money supply in checking and savings accounts decreases.
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Index of consumer
expectations
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9. Consumer attitudes toward future economic conditions are poor.
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10. Economic Events
Analyze each economic event below to determine the economic impact. Explain what changes may occur in areas such as:
- Government Tax Revenue
- Government Spending
- Automatic Stabilizers
- Production
- Employment
- Prices and consumer spending
You will determine whether each event will lead to an increase, decrease, or cause everything to stay the same.
1. A new mall opens, increasing the value by 15 percent of the appraised property in the city. What will happen to government tax revenue?
2. A nationwide housing bubble bursts; home values drop by 23 percent. What will happen to tax revenues?
3. A local factory closes; 14 percent of homes are foreclosed on. What happens to the unemployment rate?
4. Inflation rises drastically. Prices-and city expenses-increase by 6 percent. As prices continue to rise, what will happen to consumer spending?
5. The population grows considerably; a new school is needed. The cost is $1.2 million. How will this event impact unemployment rates?
6.. Ironically, the firehouse burns down. A new one is needed immediately. The cost is $1.2 million. (Assume that the funds cannot be raised by issuing bonds.) How does this event impact government spending?
7. The economy enters a recession. How does this event impact tax revenues?
8. High gas prices lead to fewer drivers-and fewer speeding tickets. Citation revenues drop by one third (33 percent). While this event will lead to an increse in government spending, will this event cause a change in tax revenues?
9. Workers at a local factory go on strike. How does this event impact production?