COMMAND AND CONTROL: A term frequently used when referring to government regulation of pollution emissions. This is where the government imposes regulations on polluters through the use of licenses, permits, zoning regulations, registration, and other controls. It should be contrasted with other methods of pollution control, especially Pigouvian tax, pollution rights market, Coase theorem, and recycling.
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BUSINESS CYCLE INDICATORS:
Assorted economic statistics that provide valuable information about the expansions and contractions of business cycles. These statistics are grouped into three sets--lagging, coincident, and leading. Leading economic indicators tend to move up or down a few months BEFORE business-cycle expansions and contractions. Coincident economic indicators tend to reach their peaks and troughs AT THE SAME TIME as business cycles. Lagging economic indicators tend to rise or fall a few months AFTER business-cycle expansions and contractions. Business cycle indicators are a series of economic measures compiled from a variety of sources by The Conference Board that track monthly business cycle activity. They provide consumers, business leaders, and policy makers with a bit of insight into the current state of the economy and glimpse into where the economy might be headed.
The actual measures used as business cycle indicators are collected by several different government agencies and private organizations, including the Bureau of Labor Statistics, the Federal Reserve System, and the Dow Jones Company. These measures are then compiled by economists and number crunchers at the Conference Board into leading, coincident, and lagging indicators used to analyze business-cycle instability.
The Big ThreeThe business cycle indicators compiled by the Conference Board are grouped into one of three categories--leading, coincident, and lagging.
- Leading Economic Indicators: This group includes ten measures that generally indicate business cycle peaks and troughs three to twelve months before they actually occur. The ten leading indicators are: (1) manufacturers' new orders for consumer goods and materials, (2) an index of vendor performance, (3) manufacturers' new orders for nondefense capital goods, (4) the Standard & Poor's 500 index of stock prices, (5) new building permits for private housing, (6) the interest rate spread between U.S. Treasury bonds and Federal Funds, (7) the M2 real money supply, (8) average workweek in manufacturing, (9) an index of consumer expectations, and (10) average weekly initial claims for unemployment insurance.
- Coincident Economic Indicators: This category contains four measures that indicate the actual incidence of business cycle peaks and troughs at the time they actually occur. In fact, coincident economic indicators are a primary source of information used to document the "official" business cycle turning points. The coincident indicators are: (1) the number of employees on nonagricultural payrolls, (2) industrial production, (3) real personal income (after subtracting transfer payments), and (4) real manufacturing and trade sales.
- Lagging Economic Indicators: This is a group of seven measures that generally indicate business cycle peaks and troughs three to twelve months after they actually occur. The lagging indicators are: (1) labor cost per unit of output in manufacturing, (2) the average prime interest rate, (3) the amount of outstanding commercial and industrial debt, (4) the Consumer Price Index for services, (5) consumer credit as a fraction of personal income, (6) the average duration of unemployment, and (7) the ratio of inventories to sales for manufacturing and trade.
Handy CompositesThe individual indicators are useful in their own right, but when combined as composite measures, they provide even greater insight into the business cycle activity. The ten separate leading economic indicators are combined into a handy composite index of leading economic indicators. So too are the four coincident and seven lagging indicators combined into handy composite indicators.
How They TrackThe exhibit to the right can be used to illustrate each of the three sets of business cycle indicators individually and how they relate to the official tracking of business cycle peaks and troughs.
First, take note of the somewhat jagged red line displayed in the exhibit. It provides a hypothetical tracking of real gross domestic product over several months. Two peaks are evident, labeled with P. One trough is displayed as well, marked by T.
A composite for any of the three groups of indicators can be displayed by clicking the corresponding [Leading], [Coincident], and [Lagging] buttons. Or to display all three simultaneously, click the [All] button.
|Business Cycle Indicators
- Leading: A click of the [Leading] button reveals a thin blue line that rises and falls a few months before real GDP rises and falls, thus anticipating the peaks and troughs of the business cycle. In effect, this blue leading indicator line parallels movements of the red real GDP line, but it does so earlier.
- Coincident: A click of the [Coincident] button reveals a thin green line that rises and falls together with the rise and fall of real GDP, tracking along with the peaks and troughs of the business cycle. This green coincident indicator line lies virtually on top of the red real GDP line.
- Lagging: A click of the [Lagging] button reveals a thin purple line that rises and falls a few months after real GDP rises and falls. In this case, the purple lagging indicator line also parallels movements of the red real GDP line, but it does so after the fact.
A click of the [All] button displays all three business cycle indicators along with the red line that displays real GDP. When combined all three indicators reveal a particular pattern. The leading indicators rise and fall before the business cycle. The coincident indicators rise and fall with the business cycle. And the lagging indicators rise and fall after the business cycle.
Valuable InformationTracking business cycle activity, especially peak and trough turning points, can be quite useful. At the very least, this information can help anticipate and possibly avoid the problems of unemployment and inflation that tend to arise during specific business cycle phases.
- If, for example, Dan Dreiling works in an industry that tends to suffer high rates of unemployment during contractions, then identifying business cycle peaks that mark the onset of contractions can help him prepare for an upcoming layoff. He might want to postpone expenditures, add a little extra into his savings account, or even search for other employment.
- Alternatively, if Winston Smythe Kennsington III has a great deal of financial wealth that could be reduced by inflation, then identifying business cycle troughs that mark the onset of expansions can also provide valuable information. Knowing that an expansion is about to begin, he might want to rearrange his investment portfolio, transferring his financial wealth between stocks, bonds, and assorted bank accounts.
While individuals can personally benefit from business cycle indicators, this information is perhaps even more useful to government policy makers (especially the President, Congress, and Chairman of the Federal Reserve System). Because the public has entrusted these folks with the responsibility of solving economic problems and guiding the country to prosperity, they MUST stay informed about business cycle activity. NOT staying informed is just the sort of thing that can transform a President into an EX-President or an elected politician into a lobbyist.
Working TogetherOf the three sets of indicators, leading indicators tend to get the most notoriety. The reason is probably obvious--by virtue of forecasting coming events. All three, however, have important roles to play in tracking business cycles.
- On the Horizon: Leading indicators "predict" what the economy will be doing a few months down the road. In contrast, coincident indicators document what the economy is currently doing and lagging indicators reinforce what happened to the economy a few months back. Knowing what WILL happen is almost always more important that knowing what IS happening or what DID happen already.
However, while leading indicators TEND to predict business cycles, they are not always correct. In fact, leading indicators have actually predicted "12 of the last 9 contractions." In other words, they predicted 3 contractions that never happened.
- The Here and Now: While leading indicators might predict business cycles, it is nice to document the actual event, which is the role of coincident indicators. Having accurate information about CURRENT economic conditions is not as easy as it might seem. Collecting, processing, and analyzing data takes time. While financial data (stock market prices, interest rates, etc.) are available almost instantaneously, most information about the economy is available only weeks, if not months, after the fact. Coincident indicators are some of the most timely economic measures available.
- Over and Done: At this point there might be some question about the usefulness of lagging indicators. Of what good is knowing the state of the economy several months AFTER the fact? In the wacky world of economic number crunching, lagging indicators actually have a useful role. In particular, lagging indicators are needed to "finalize" the most recent contraction. Lagging indicators must mark the trough of the previous contraction before leading indicators can signal the peak of the current expansion and the beginning of the next contraction. In other words, the next recession cannot start until the lagging indicators indicate that the last one is over.
BUSINESS CYCLE INDICATORS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 27, 2024].
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