Define Economic Indicators
Economic indicators can be used to some extent to predict the business cycle. There are three main types of economic indicators that are used to forecast, measure and interpret short-term fluctuations in the economy: Leading, coincident and lagging indicators.
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Business Cycle
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The business cycle is a recurring pattern of contraction and expansion. A contraction occurs during periods of recession, whereas an expansion occurs when the economy is recovering.
Leading Indicators
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Leading economic indicators are those that rise or fall in advance of the rest of the economy. Some examples of leading indicators are the average weekly hours worked by production employees and initial claims for unemployment benefits.
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Coincident Indicators
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Coincident economic indicators, as suggested by their name, move in tandem with the rest of the economy. Examples of coincident indicators are industrial production and the number of employees on nonagricultural payrolls.
Lagging Indicators
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Lagging economic indicators are indicators that rise or fall somewhat later than the rest of the economy. Some lagging indicators are the average duration of unemployment and the number of outstanding commercial/industrial loans.
Significance
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As the economy passes through the different stages of the business cycle, the relative performance of different industry groups will probably vary. For example, during a recession, the performance of manufacturers of durable goods (such as refrigerators and automobiles) will suffer because the purchase of these goods can be deferred until the economy recovers.
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