Index of Leading Indicators

Index of Leading Indicators is one of Economic Indicators. It consists of ten different components.

An economic indicator is a statistical indicator by which the economic performance of present and predictions of the future performance can be analyzed. It is also used in the study of business cycles. So economic indicators are also referred as business indicator.

These indicators are produced in United States of America by The National Bureau of Economic Research (private), The Bureau of Labor Statistics, The United States Census Bureau and United States Bureau of Economic Analysis.

These business indicators can be classified into three groups according to their timing in relation to the business cycle.

They are:

Index of Leading Economic Indicators

Index of Leading Indicators usually change before the economy as a whole changes. They are therefore useful in predicting the economy in advance for the short term.

Stock market returns as a whole is also a leading indicator. The stock market usually begins to fall before the economy as a whole comes down and usually begins to improve before the general economy begins to improve.

The Conference Board (founded in 1916 as a non profit, non partisan business membership and research group), publishes a group of ten indicators called as The Index of Leading Economic Indicators. These are designed to predict economic activity in the United States six to nine months in advance.

The ten components of Index of Leading Indicators are:

  1. Average weekly hours of manufacturing workers.
    Before the economy improves the production and there by the working hours of manufacturing workers increases.
  2. Average weekly initial jobless claims for unemployment insurance.
    The decrease in the initial jobless claims of unemployment insurance indicates improved economy.
  3. Manufacturer's new orders for consumer goods and materials.
    Increased orders for consumer goods and materials indicates improved economy as a whole.
  4. Vendor performance (slower deliveries diffusion index).
    This component is measured by a monthly survey from the National Association of Purchasing Managers (NAPM). Vendor performance leads the business cycle because an increase in delivery time can indicate rising demand for manufacturing supplies.
  5. Manufacturer's new orders for capital goods not related to defence.
    Increase in new orders means increasing demand and there by increasing production. Thus new orders leads the business cycle.
  6. Building permits for new private residential buildings.
    Increased private building permits indicate improved economy.
  7. The Standard & Poor's 500 stock index.
    The S&P 500 is considered as a leading indicator because increase in stock prices reflect improving economy and interest rates.
  8. Money Supply (M2).
    Easy money flow is the blood flow for the health of the economy.
  9. The spread between short, medium and long term interest rates.
    When the yield curve of long term interest rate is better than short term interest rate, it more accurately predicts improving economic cycle.
  10. Index of consumer expectations.
    Consumer expectations indicate future increasing or decreasing spending and this index leads the changes in the economic cycle.

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