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 cyclelet alone implementing the right fiscal response at the right timeis 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.

Indicator	Description	Does a change anticipate expansion or a contraction?
Average weekly hours in manufacturing	1. The average number of hours worked per week by factory workers increases.
Average weekly claims for unemployment	2. The average number of new claims for unemployment benefits decreases.
Manufacturers' new orders for consumer goods	3. Orders received by manufacturers for consumer goods decreases.
Vendor performance index	4. How quickly suppliers deliver supplies to manufacturers decreases.
Manufacturers' new orders for capital	5. Orders received by manufacturers for capital goods (machines), increases.
New housing permits	6. The number of new housing permits issued by local governments decreases.
Stock prices	7. The S&P 500 stock index (Stock Market) is steadily rising.
Money supply	8. Themoney supply in checking and savings accounts decreases.
Index of consumer expectations	9. Consumer attitudes toward future economic conditions are poor.

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. Pricesand city expensesincrease 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 driversand 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?