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Forecasting economic activity, such as economic indicators for a recovery from recession, has never been an exact science. After the Great Depression, economists began to search for ways to predict a recession recovery during the business cycle. During this time two men named Arthur Burns and Wesley Mitchell of the National Bureau of Economics Research (NBER) began studying patterns of economic data that were available, and published a book in 1946 titled "Measuring Business Cycles". These business cycles that they observed were described as "consist of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle". This was the first mention of studying the business cycle using economic indicators, and these were further developed later by Dr. Geoffrey Moore while at NBER.
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National Bureau of Economics Research (NBER)
The NBER collects and researches empirical data as far back as records allow. It releases data quarterly and during each month, and has become widely accepted as an organization that defines when a recession or a recession recovery begins. The most popular definition of a recession collected from NBER data is that the economy is in a recession when the Gross National Product (GNP) has declined for two quarters in succession. The researchers at the NBER found this definition too narrow to be consistent and adopted a broader definition that included the dimensions of duration, depth, and diffusion across industries (3Ds). The following years of data are examples of this:
There were two sharp recessions from May 1923 to July 1924 and November 1973 to March 1975.
1. The duration of the first recession was 14 months; the GNP declined -4.1%; the unemployment rate reached a maximum of 5.5%; and the industries with declining employment reached a maximum rate of 94%.
2. The duration of the second recession was 16 months; the GNP declined -4.9%; the unemployment rate reached a maximum of 9.0%; and the industries with declining employment reached a maximum rate of 88%.
There were two mild recessions from October 1926 to November 1927, and July 1990 to March 1991.
1. The duration of the first recession was 13 months; the GNP declined -2.0%; the unemployment rate reached a maximum of 4.4%; and the industries with declining employment reached a maximum rate of 71%.
2. The duration of the second recession was 8 months; the GNP declined -1.2%; the unemployment rate reached a maximum of 6.9%; and the industries with declining employment reached a maximum rate of 73%.
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The Conference Board and BCI
In 1916 the Conference Board was created by industry leaders to try and address the threatening economic instability due to declining public opinion toward business and labor unrest. It was to be an independent, not-for-profit organization of business executives acting in the public interest addressing issues that impact industries and society. Their website states their mission as, "To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society."
The Conference Board uses individual economic indicators that are announced at different times during the months to create the Business Cycle Indexes (BCI). These indicators were first observed by Burns and Mitchell and were later developed by Dr. Geoffrey Moore at NBER. The BCI consists of three indexes that reflect the state of the economy as it fluctuates through the business cycle. These indexes in turn consist of indicators considered to be of predictive value that are used as economic indicators for a recovery. They are the Composite Index of Leading Indicators, the Composite Index of Coincident Indicators, and the Composite Index of Lagging Indicators.
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Leading Economic Indicators
The Leading Economic Indicators - An index whose components whose releases are generally considered to precede movements of the economic cycle. These contain the most widely used economic indicators for recovery that many people look for. They are:
- Average weekly hours (manufacturing)
- Average weekly jobless claims for unemployment insurance
- Manufacturer's new orders for consumer goods/materials
- Vendor performance (slower deliveries diffusion index)
- Manufacturer's new orders for non-defense capital goods
- Building permits for new private housing units
- The Standard & Poor's stock index
- Money Supply (M2)
- Interest rate spread (10-year Treasury vs. Federal Funds target)
- Index of consumer expectations
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Coincident Economic Indicators
The Coincident Economic Indicators - This index is composed of four economic indicators that are generally considered to reflect the present state of the economic cycle; is it healthy or waning? They are:
- Personal income less transfer payments
- Manufacturing and trade sales
- Industrial production
- Employees on nonagricultural payrolls
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Lagging Economic Indicators
The Lagging Economic Indicators - Is composed of seven economic indicators for a recovery that usually lag behind the major movements of the other two indexes but is considered a valuable affirmation that the business cycle has entered a new stage. If this hasn't happened, something could have been missed by the other two indexes. They are:
- Commercial and industrial loans outstanding
- Consumer Price Index (CPI) for services
- Average duration of unemployment
- Ratio of consumer installment credit to personal income
- Ratio of manufacturing and trade inventories to sales
- Change in labor cost per unit of output
- Average prime interest rate charged by banks
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The BCI Rule of Thumb
As with the NBER definition, a general rule developed for the BCI stating that a recession is imminent when the Index of Leading Indicators has declined over three consecutive months. This rule was considered too narrow or rigid by the Conference Board and can generate some false readings on the graphs. Better reliability is achieved with greater breadth by looking for sharper, longer lasting declines in the index with a greater number of the ten economic indicators declining also. This was achieved by the development of a diffusion index by the CB. This index can measure how many of the components of any BCI indexes are moving in the same direction as the overall index.
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The National Board of Economic Research (NBER) and the Conference Board (CB) have been around since the early decades of the twentieth century. Both research empirical economic data, and try to present useful information to today's businesses and the general public. Quarterly and monthly releases can be found on NBER's web site located at http://www.nber.org/releases/. The Conference Board releases global business cycle indicators for ten countries every month at http://www.conference-board.org/data/bci.cfm.
"Recessions," The Concise Encyclopedia of Economics, 2010. Library of Economics and Liberty. Geoffrey H. Moore
"Conference Board: Composite Index of Leading Indicators," 2010. Investopedia. Chris Stone
"Conference Board: Composite Index of Coincident Indicators," 2010. Investopedia, Chris Stone
"Conference Board: Composite Index of Lagging Indicators," 2010. Investopedia. Chris Stone
1953 Recession in the US/Wikimedia Commons/Jay Henry
GDP Growth/Wikimedia Commons/Emilfaro
Inflation and Interest Rates/Wikimedia Commons/Lawrencekhoo