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Index of Leading Indicators

 

 
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The Index of Leading Indicators is an American
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 economic index
Index

An index is a system used to make finding information easier.Index may also refer to:* Index , a detailed list, usually arranged alphabetically, of the specific information in a publication...
 intended to estimate future economic activity. It is calculated by The Conference Board
The Conference Board

The Conference Board, Inc. is a non-profit global business organization supported by business executives that holds conferences, convenes executives and conducts business management research....
, a non-governmental organization
Non-governmental organization

Non-governmental organization is a term that has become widely accepted for referring to a legally constituted, non-business organization created by natural or legal persons with no participation or representation of any government....
, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession
Recession

In economics, the term recession describes the reduction of a country's gross domestic product for at least two Calendar_year#Quarters. The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction....
 and upward before an expansion
Expansion

selfref|On Wikipedia, "expansion" may refer to...
. The single index value composed from these ten variables has generally proved capable of predicting recessions over the past 50 years.






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The Index of Leading Indicators is an American
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 economic index
Index

An index is a system used to make finding information easier.Index may also refer to:* Index , a detailed list, usually arranged alphabetically, of the specific information in a publication...
 intended to estimate future economic activity. It is calculated by The Conference Board
The Conference Board

The Conference Board, Inc. is a non-profit global business organization supported by business executives that holds conferences, convenes executives and conducts business management research....
, a non-governmental organization
Non-governmental organization

Non-governmental organization is a term that has become widely accepted for referring to a legally constituted, non-business organization created by natural or legal persons with no participation or representation of any government....
, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession
Recession

In economics, the term recession describes the reduction of a country's gross domestic product for at least two Calendar_year#Quarters. The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction....
 and upward before an expansion
Expansion

selfref|On Wikipedia, "expansion" may refer to...
. The single index value composed from these ten variables has generally proved capable of predicting recessions over the past 50 years. Those who have an activist view believe in discretionary monetary
Monetary policy

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy....
 and fiscal policy
Fiscal policy

In economics, fiscal policy is the use of government spending and revenue collection to influence the economy.Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money....
. They believe that the index of leading indicators can provide an early warning system
Early warning system

Early warning system is the term that the International Early Warning Programme coordinated by the United Nations uses for all systems that are used to send emergency population warnings....
 so that policymakers can shift toward macroeconomic stimulus when the index fails.

One problem with the index of leading indicators is that the time lag between the signal of a recession and the actual recession has varied widely. Also, on a few occasions, the index of leading indicators has fallen, and no recession occurred. That is, the index has given a few false alarms. Hence, policymakers must react carefully to the changes in the index.

The 10 components of the Index include:

  1. Average number of initial applications for unemployment insurance
  2. Number of manufacturers' new orders for consumer goods and materials
  3. Speed of delivery of new merchandise to vendors from suppliers
  4. Amount of new orders for capital goods unrelated to defense
  5. Amount of new building permits for residential buildings
  6. The S&P 500
    S&P 500

    The S&P 500 is a market value-weighted index published since 1957 of the prices of 500 market capitalization common stocks actively traded in the United States....
     stock index
  7. Inflation-adjusted money supply
    Money supply

    In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
     (M2)
  8. Spread between long and short interest rates (the yield curve
    Yield curve

    In finance, the yield curve is the relation between the interest rate and the time to Maturity of the debt for a given borrower in a given currency....
    )
  9. Consumer sentiment
  10. Average weekly hours worked by manufacturing workers


While this index correctly forecast each of the 7 recessions during the 1959-2001 period it also has forecast 5 recessions that did not occur.

This naturally brings to mind a famous saying by economist Paul Samuelson
Paul Samuelson

Paul Anthony Samuelson is an United States neoclassical economist economist known for his contributions to many fields of economics, beginning with his general statement of the comparative statics method in his 1947 book Foundations of Economic Analysis....
: "Economists have correctly predicted nine of the last five recessions."

Sources