The business cycle goes through 4 phases:
Economic Expansion: Real GDP is increasing
Economic Contraction: Real GDP is declining
Peak: The economy reverses from expansion to contraction
Trough: The economy reverses from contraction to expansion
Economic Recession: When the economy is in a downturn for at least six months. Growth rate is negative, unemployment increases, and price level is most likely to rise.
Economic Depression: A prolonged recession declared when the unemployment rate is 12% or more.
Leading Economic Indicators
Leading Economic Indicators are designed to predict what will happen within the economy in a given period of time, usually in the short-term. Some of the things to consider when trying to predict economic activity are as follows:
- Average workweek for manufacturing sector: If firms in general are asking employees to work longer weeks this indicates an increased demand. This means that firms are more likely to engage in new hires and increase production. In contrast, if a workweek is shorter, then it is possible that firms may be laying off workers in the near future and will decrease their production.
- Average weekly unemployment insurance claims: If the number of people increases for new insurance claims then that is a sign that more companies are laying off their workers and thus decreasing their production as well.
- New orders for consumer goods: An increase in orders for consumer goods would be a good sign for the economy because it suggests that there is an increased demand and so the company is expecting to sell more and gain more revenue as well as hire more workers to compensate for increased production.
- Index of consumer confidence: A high value of consumer confidence would be a good sign for the economy suggesting that there will be an increased demand for goods and services.
- New orders for non-defense durable goods: This is similar to the orders for consumer goods, so more orders would be a positive sign for the economy.
- Number of new building permits issued for private housing units: Since building permits make up a part of investment which is a component of GDP, an increase in the number of building permits would be a good sign for economic activity.
- Stock Prices: This is an indicator of how investors are viewing the economy. An increase in stock prices indicates that investors are expecting the economy to do well.
- Interest Rate Spread: This is a reflection about the expectations of the future market interest rates. If there is a large spread, then that means interest rates are expected to rise thus increasing overall economic activity.
- Money Supply: If there is more money then that means people are spending more which leads to employment which leads to higher production.
- Vendor Performance: This is tied to deliveries which correlate directly with production. When companies are experiencing an increased demand, deliveries slow down therefore indicating a possible future increase in economic activity.
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