Measuring Economic Health

Economists keep their fingers on the pulse of the economy at all times, determined to cure what ails it.

Intensive care is a 24-hour business. Doctors and nurses measure vital signs, record changes in temperature and physical functions, conduct test after test. That gives you an idea of how thousands of experts – and countless more interested amateurs – watch the economy.

The biggest differences? The vigil never stops – even when the economy seems healthy. And there are usually multiple causes for any sign of weakness, often including a number that can't be cured by treating the U.S. economy alone.

The Index of Leading Economic Indicators is released every month by The Conference Board, a business research group. The numbers rarely surprise the experts, since many of the components are reported separately before the Index is released. But it does provide a simple way to keep an eye on the economy's overall health. Generally, three consecutive rises in the Index are considered a sign that the economy is growing – and three drops, a sign of decline and potential recession.

Ten leading indicators are averaged to produce the Index, with some carrying more weight than others. Taken together, they're designed to predict short-term economic conditions. There's a similar list of lagging indicators to give an overview of how factors including business spending and bank interest rates have been affected by the economy.

  1. Average weekly hours, manufacturing
  2. Average weekly initial claims for unemployment insurance
  3. Manufacturers' new orders, consumer goods and material
  4. Vendor performance, slower deliveries diffusion index
  5. Manufacturers' new orders, non defense capital goods
  6. Building permits, new private housing units
  7. Stock prices, 500 common stocks
  8. Money supply, M2
  9. Interest rate spread, 10-year Treasury bonds less federal funds
  10. Index of consumer expectations
Source: The Conference Board

A Mixed Record

In the past, the Index has accurately anticipated economic downturns up to 18 months in advance, and correctly predicted all recessions since 1950. But it has also signaled potential recessions that have never materialized.

Unemployment Figures

New unemployment claims for state unemployment insurance give a sense of the number of people losing their jobs. A falling number is a sign the economy is growing and employers are adding jobs.

The flip side of low unemployment, however, is the fear of increasing inflation. In the past, at least, employers have increased wages to attract new workers when competition grew tight. Whether that pattern will be true in the future remains unanswered, as no economic cycle repeats the past exactly.

Durable Goods

A backlog of orders for a wide range of manufactured products, from machinery to transportation equipment, signals that demand that will help the economy expand. Fewer orders suggests a slowdown is in the works and that a recession is possible.

Housing Starts

The number of housing permits being issued is a measure of economic health. A growing economy typically generates increased demand for new housing. But in slow times, housing starts typically begin to drop off. In 2000-2002, housing starts were more positive than other indicators.

New Factory Orders

Rising orders reported by manufacturers for consumer goods and materials affirms confidence in the economy and suggests continued growth. Fewer orders suggest consumer confidence is down.

© 2004 by Lightbulb Press, Inc. All Rights Reserved.
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