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F I G U R E 11.4
Cyclical indicators, 1967“2001
Source: Business Cycle Indicators, The Conference Board, February 2002.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition




393
11 Macroeconomic and Industry Analysis


rarely be obvious. It usually is not apparent that a recession or expansion has started or ended
until several months after the fact. With hindsight, the transitions from expansion to recession
and back might be apparent, but it is often quite difficult to say whether the economy is heat-
ing up or slowing down at any moment.

Economic Indicators
Given the cyclical nature of the business cycle, it is not surprising that to some extent the cy-
cle can be predicted. The Conference Board publishes a set of cyclical indicators to help fore-
cast, measure, and interpret short-term fluctuations in economic activity. Leading economic leading economic
indicators are those economic series that tend to rise or fall in advance of the rest of the econ- indicators
omy. Coincident and lagging indicators, as their names suggest, move in tandem with or Economic series that
somewhat after the broad economy. tend to rise or fall in
Ten series are grouped into a widely followed composite index of leading economic indi- advance of the rest of
the economy.
cators. Similarly, four coincident and seven lagging indicators form separate indexes. The
composition of these indexes appears in Table 11.2.
Figure 11.5 graphs these three series over the period 1958“2001. The numbers on the charts
near the turning points of each series indicate the length of the lead time or lag time (in
months) from the turning point to the designated peak or trough of the corresponding business
cycle. While the index of leading indicators consistently turns before the rest of the economy,
the lead time is somewhat erratic. Moreover, the lead time for peaks is consistently longer than
that for troughs.


A. Leading indicators
TA B L E 11.2 1. Average weekly hours of production workers (manufacturing).
Indexes of economic 2. Initial claims for unemployment insurance.
indicators
3. Manufacturers™ new orders (consumer goods and materials industries).
4. Vendor performance”slower deliveries diffusion index.
5. New orders for nondefense capital goods.
6. New private housing units authorized by local building permits.
7. Yield curve: spread between 10-year T-bond yield and federal funds rate.
8. Stock prices, 500 common stocks.
9. Money supply (M2).
10. Index of consumer expectations.
B. Coincident indicators
1. Employees on nonagricultural payrolls.
2. Personal income less transfer payments.
3. Industrial production.
4. Manufacturing and trade sales.
C. Lagging indicators
1. Average duration of unemployment.
2. Ratio of trade inventories to sales.
3. Change in index of labor cost per unit of output.
4. Average prime rate charged by banks.
5. Commercial and industrial loans outstanding.
6. Ratio of consumer installment credit outstanding to personal income.
7. Change in consumer price index for services.

Source: Business Cycle Indicators, The Conference Board, February 2002.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition




394 Part FOUR Security Analysis




Apr. Apr. Feb. Dec. Nov. Nov. Mar. Jan. JulyJuly Nov. July Mar. Mar.
T PT P T P T P TP T P T P
14
910. Composite index of 10 leading indicators
110 110
(series 1, 5, 8, 19, 27 ,29, 32, 83, 106, 129)
6
100 100
90 90
9 15 3 2
8
80 80
8
70 70
3
7 2
11
60 60
December 2001
3

920. Composite index of 4 coincident indicators 3
130 130
(series 41, 47, 51, 57)
110 110
1
90 90
0 0
0
0
70 70
1
2 0
50 50
0
0
00
December 2001
30 30

930. Composite index of 7 lagging indicators 4
110 110
(series 62, 77, 91, 95, 101, 109, 120)
3 12
2
13
3
100 100

3
90 90
6 21
3 22
15
80 80
December 2001
9


10
940. Ratio, coincident index to lagging index
110 110
100 100
0
90 90
10 8
80 80
2
11
70 70
2 10
60 60
10 0
December 2001
50 50
0
10

58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02




F I G U R E 11.5
Indexes of leading, coincident, and lagging indicators
Source: Business Cycle Indicators, The Conference Board, February 2002.
Bodie’Kane’Marcus: IV. Security Analysis 11. Macroeconomic and © The McGraw’Hill
Essentials of Investments, Industry Analysis Companies, 2003
Fifth Edition




395
11 Macroeconomic and Industry Analysis


The stock market price index is a leading indicator. This is as it should be, as stock prices are
forward-looking predictors of future profitability. Unfortunately, this makes the series of leading
indicators much less useful for investment policy”by the time the series predicts an upturn, the
market has already made its move. While the business cycle may be somewhat predictable, the
stock market may not be. This is just one more manifestation of the efficient market hypothesis.
The money supply is another leading indicator. This makes sense in light of our earlier dis-
cussion concerning the lags surrounding the effects of monetary policy on the economy. An
expansionary monetary policy can be observed fairly quickly, but it might not affect the econ-
omy for several months. Therefore, today™s monetary policy might well predict future eco-
nomic activity.
Other leading indicators focus directly on decisions made today that will affect production
in the near future. For example, manufacturers™ new orders for goods, contracts and orders for
plant and equipment, and housing starts all signal a coming expansion in the economy.
A wide range of economic indicators are released to the public on a regular “economic cal-
endar.” Table 11.3 lists the public announcement dates and sources for about 20 statistics of


Statistic Release Date* Source
TA B L E 11.3
Commerce Department
2nd of month
Auto and truck sales
Economic calendar
Commerce Department
15th of month
Business inventories
Commerce Department
1st business day of month
Construction spending
Conference Board
Last Tuesday of month
Consumer confidence
Federal Reserve Board
5th business day of month
Consumer credit
Bureau of Labor Statistics
13th of month
Consumer price index (CPI)
Commerce Department
26th of month
Durable goods orders
Bureau of Labor Statistics
End of first month of quarter
Employment cost index
Bureau of Labor Statistics
1st Friday of month
Employment record
(unemployment, average
workweek, nonfarm
payrolls)
National Association of
25th of month
Existing home sales
Realtors
Commerce Department
1st business day of month
Factory orders
Commerce Department
3rd“4th week of month
Gross domestic product
Commerce Department
16th of month
Housing starts
Federal Reserve Board
15th of month
Industrial production
Department of Labor
Thursdays
Initial claims for jobless
benefits
Commerce Department
20th of month
International trade balance
Conference Board
Beginning of month
Index of leading economic
indicators
Federal Reserve Board
Thursdays
Money supply
Commerce Department
Last business day of month
New home sales
Bureau of Labor Statistics
11th of month
Producer price index
Bureau of Labor Statistics
2nd month in quarter
Productivity and costs
(approx. 7th day of
month)
Commerce Department
13th of month
Retail sales

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