business cycle, consumption, economic cycle, economic indicators, economic recovery, economics, employment, exports, GDP, gross domestic product, housing, investment, lagging indicators, Leading Economic Index, leading indicators, NBER, prices, production, recession, sales
(originally published to Helium writing site, now gone)
A range of economic indicators are used to determine whether an economy is in the recovery stage of the business or economic cycle and how well it is performing. The recovery phase kicks in as soon as an economy has past the trough and moves into the upswing, even though the economy might still be in recession. Gross domestic product is perhaps the most widely used indicator of where an economy is positioned on the cycle, although there are a large number of other indicators covering areas such as employment, production, sales, prices, housing, and more.
Gross domestic product
In the US, gross domestic product data from the Bureau of Economic Analysis indicates that the US economy bottomed out in the December 2008 quarter with a fall in annualized real GDP of 7.0%. Positive growth has been recorded for the last seven quarters (since September 2009 quarter), although the recovery has been tentative. Growth rose to 4.9% in December 2009 quarter, before slipping to 1.7% in June 2010 quarter. It then increased to 3.1% in December 2010 quarter, but fell to 1.9% in March 2011 quarter (since revised to 1.8%).
The components of GDP are often used to assist in measuring an economic recovery. In the US, personal consumption expenditures have been increasing at a slightly higher rate than GDP overall. Consumption rose 2.2% on an annualized basis in March 2011 quarter, after an increase of 4.0% in the previous quarter. Gross private domestic investment is more volatile, climbing 12.4% in March quarter, following a fall of 18.7% in December quarter. Exports have been rising strongly, by 8.6% and 7.6% in the last two quarters, while government spending declined 1.7% and 5.8% in these periods. These are signs that the US economy is in recovery mode.
There are some limitations in using GDP to measure economic recovery. Source data comes from various censuses and surveys of individuals and businesses, and administrative figures, and is subject to errors and estimations of various descriptions. Also, gross domestic product doesn’t take into account regional disparities, income inequality, non-market transactions (such as unpaid work), the underground economy (such as illegal activities), bartering, and asset values (such as housing prices). These factors can vary dramatically over time and between countries.
Other indicators are usually used as well as GDP data. These indicators are often divided into leading, lagging and coincident indicators. Leading indicators give an early sign of economic performance and recovery and are available before data for the whole economy is put together. Consumer expectations and building permits are good examples. Another is stock market indexes as these usually move before the economy itself.
The Leading Economic Index, a business cycle indicator of the Conference Board, is a composite of ten leading indicators and is used to predict turnings points in the economy, progress of an economic recovery, and so on. The indicators include the labor market (unemployment rate, hourly earnings and hours worked), new unemployment claims, new manufacturing orders for consumer and capital goods, an index of supplier deliveries, building permits and housing starts, stock price index (the S&P 500), the M2 money supply, interest rates, and consumer expectations. The index increased 0.7% in March, fell 0.4% in April and rose 0.8% to 114.7 in May 2011 (2004 = 100). These figures suggest the economic recovery should continue.
The Board publishes business cycle indicators for ten other countries too, using available leading indicators in each country. The index for the UK has increased in each of the last three months, although it stood at just 103.8 in May. The Euro Area isn’t faring as well, with falls in March and May to be 108.8. Japan is struggling to come out of recession too, with an index of 94.2.
Lagging indicators come later than the general economy. These indicators are still important though as they can back up or confirm moves in leading indicators. Good examples are unemployment and consumer prices. The Conference Board publishes a Lagging Economic Index for major countries. In the US, this index has increased slightly in each of the three months to May, perhaps confirming the tentative recovery.
Then there are coincident indicators that measure the current state of the economy. Gross domestic product is the best known example. The Conference Board’s Coincident Economic Index includes the employment level, personal income, production and sales.
The National Bureau of Economic Research uses a business cycle dating process to determine when the US economy is in recession, recovery, and so on. NBER uses economic indicators such as GDP, gross domestic income, sales, production and employment. It defined the US as being in recession from December 2007 to June 2009, with GDP falling 12.8% during this period. Based on its analysis of economic indicators, the NBER regards the US economy as being out of recession and in the recovery stage, however tentative. This backs up the findings of the Conference Board and indeed the statistics themselves.
An economic recovery is measured by a number of indicators, none of which is perfect. The main indicator is gross domestic product, which suggests the US and many other major economies are in the economic recovery stage, although this is not to say that some areas of the economy, and some regions, aren’t struggling. The Conference Board and the NBER use a range of indicators to determine where the economy sits on the business cycle.