Inventory behavior is an example of a leading indicator a variable that consistently changes a few months in advance of changes in macroeconomic activity and that thus can be used to forecast business cycles. Experience has shown that depending on a single leading indicator is unwise, but combining several leading indicators into a composite index produces much better forecasts of business cycles. One such composite is the Index of Leading Indicators, compiled monthly by the Conference Board, a private, not-for-profit, nonadvocacy organization that publishes several other statistical series including coincident, lagging, help-wanted, consumer confidence, and business confidence indices. Check www.tcb-indicators.org/
This composite index provides on average a 12.7-month advance warning of an impending recession. The indicators that make up the index vary as improvements are made; its components in 1999, in order of importance (with weights in parentheses), were as follows:
1. Spread between long-term and short-term interest rates as measured by the difference between the 10-year Treasury and the federal funds rate (.329) (interest rates are discussed in chapter 10).
2. M2 money supply in real dollars (.308) (explained in chapter 8).
3. Average workweek in manufacturing (.181).
4. Manufacturers' new orders for consumer goods in real dollars (.049).
5. Standard and Poor's index of 500 common stock prices (.032).
6. Vendor performance as measured by percentage of companies reporting slower deliveries from suppliers (.027).
7. Average weekly initial unemployment claims (inverted to produce a number that increases during expansions) (.025).
8. New private housing authorized by local building permits (.018).
9. University of Michigan index of consumer expectations (.018).
10. Manufacturers new orders for plant and equipment in real dollars (.013).
A simple rule of thumb often used is that three consecutive months of decline in the index are a sign that the economy will fall into recession.
produce the right kind of outputs or distribute them fairly. Those on the right of the political spectrum conservatives and Republicans believe the government already plays too big a role in the economy, that it is an inefficient allocator of resources, and that individuals, through their spending financed by tax reductions, can cause the market to produce and distribute more desirable outputs in a more efficient fashion.
This is a sensitive issue. Everyone agrees that there is a prominent role to be played by government spending on education, on infrastructure, on parks, and on operating things such as a legal system and an army. The disagreement comes from differing opinions about what the extent of the role of government should be.
