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Lagging economic indicators

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Overview of the Conference Board Lagging Economic Index.

Overview of the Conference Board Lagging Economic Index.

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  • CB: Independent global business membership and research association founded in 1916 as a non-profit, non-partisan organizationUsing National Bureau of Economic Research (NBER) data in the 1930s, Arthur Burns and Wesley Mitchell, popularized the study of business cycles. Their early research led to the creation of the Business Cycle Indicators (BCI), which are now published by the Conference Board (CB) and composed of three indexes.
  • The seven lagging components are averaged to smooth their results, and adjusted for volatility with a standardization factor.
  • The prime rate will move up or down in lock step with changes by the Federal Reserve Board (FOMC - Federal Open Market Committee); When times are good, banks resist lowering rates (and their profits) even if business starts to slow. When times are bad, they resist raising rates until they are sure the demand supports it. Changes in the rate typically occur after economic activity improves or declines.
  • The prime rate will move up or down in lock step with changes by the Federal Reserve Board (FOMC - Federal Open Market Committee); the prime rate generally tracks the fed funds rate at 3 percentage points above that rate
  • Data is seasonally adjusted.
  • This ratio usually shows a trough many months after the recession ends.
  • 2008-10-011602.89422004-05-01869.43572001-01-011096.4505
  • Because monthly percent changes in this series are extremely erratic, percent changes in labor costs are calculated over a six-month span.
  • The Index of Lagging Indicators should be evaluated together with the other two BCI indexes. The next recession cannot start until the lagging indicators certify that the last one is over.
  • Transcript

    • 1. Composite Index of Lagging Indicators Presented by: Alin SturekBUS 531- Managerial Economics April 23, 2013
    • 2. Agenda• Background• Index Composition• Overview of Index Components• Index Historical Trend• BCI Index Comparison
    • 3. Background• Lagging Economic Index (LAG) is the third component of the Business Cycle Indicators used to track changes in the direction of the economy – Published monthly by The Conference Board• Composite of seven economic measures that historically registered a change in the business cycle after the change has already taken place• The index is the final confirmation for economists that the business cycle has made a shift into a new stage; indicates peak and trough turning points
    • 4. Index Factors and Weights• The avg. prime rate charged by banks (28.15%)• The ratio of consumer installment credit outstanding to personal income (21.01%)• The change in the Consumer Price Index for services (19.55%)• The ratio of manufacturing and trade inventories to sales (12.11%)• The value of outstanding commercial and industrial loans (9.7%)• The change in labor cost per unit of output (5.87%)• The average duration of unemployment (3.61%)
    • 5. Average Prime Rate(Index Weight = 28.15%)• The prime interest rate is what banks charge their best customers (least risky); also known as the prime lending rate, it is based on the Federal funds rate (FOMC meets every six weeks)• The Wall Street Journal surveys the 30 largest banks; if three-quarters of them (23) report a change then the rate is effectively changed and the new rate is published on the same day• The rate was first published in 1947, when it stood at 1.75 percent; the highest value was 21.5%, reached on December 19, 1980
    • 6. Average Prime RateHistorical Trend (1980 – 2013) March 20, 2013: The FOMC has Prime Rate voted to keep the target range for the fed funds rate at 0% - .25%.25% “Therefore, the U.S. Prime Rate will 21.5% continue at 3.25%. The next FOMC meeting and decision on short-term20% rates will be on May 1ST, 2013.”15%10% 5% 3.25% 0% Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12Source: http://homeguides.sfgate.com/prime-rate-change-8904.html
    • 7. Consumer Debt to Income Ratio(Index Weight = 21.01%)• The household debt service ratio (DSR) is an estimate of the ratio of debt payments (outstanding mortgage and consumer debt) to disposable personal income• Data is collected in two parts: – Consumer debt provided by the Federal Reserve – Income reported by the Bureau of Economic Analysis• After a recession, borrowing tends to lag improvements in personal income because people are cautious to take on new debt; during bad times debt levels typically increase in order to continue supporting their lifestyle
    • 8. DSR RatioHistorical Trend (1990 – 2013) DSR Ratio15.0 13.5614.013.012.011.0 10.6310.0 10.38 9.0 8.0 7.0 6.0Source: www.federalreserve.gov/releases/housedebt/
    • 9. Change in CPI for Services(Index Weight = 19.55%)• Based on the Consumer Price Index but excludes food and energy due to their volatility – Measures the core rate of inflation (shelter, used cars, medical care, personal care, apparel, household furnishings, etc.)• The CPI for Services measures inflation in consumer prices for service products; it signifies whether price increases have arrived• Provided monthly by the Bureau of Labor Statistics
    • 10. CPI for ServicesHistorical Trend (1980-2013) CPI for Services250.000 232.76200.000150.000 Jan 79 – Dec 80 Average = .93%100.000 The index for all items less food and energy increased 0.1 percent in March following increases of 0.3 percent in January and 0.2 percent 50.000 in February. 1982-84=100 0.000 Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 May-71 May-75 May-79 May-83 May-87 May-91 May-95 May-99 May-03 May-07 May-11 Sep-72 Sep-76 Sep-80 Sep-84 Sep-88 Sep-92 Sep-96 Sep-00 Sep-04 Sep-08 Sep-12Source: http://research.stlouisfed.org/fred2/graph/?s[1][id]=CPILFESL
    • 11. Business Inventories to Sales Ratio(Index Weight = 12.11%)• Provides gauge on inventory levels compared to current sales• Provided monthly by the Bureau of Economic Analysis (data collected by the Census Bureau)• Inventories will rise if sales fail to meet projections during an economic downturn. But they decline as excess inventory is used to meet initial demand during an expansion
    • 12. Inventories to Sales RatioHistorical Trend (2004 – 2013)Source: http://www.census.gov/mtis/
    • 13. Commercial and Industrial Loans(Index Weight = 9.7%)• Volume of business loans held by banks and commercial paper issued by nonfinancial companies (total dollar value)• Provided by the Federal Reserve• If profits decline or liquidity impacts business operations, firms will require additional loans or increase their lines of credit; troughs are typically seen more than a year after the recession ends
    • 14. C and I Loans at all Commercial BanksHistorical Trend (1940 – 2013) 1602.89 1541.06 1096.45 869.44Source: http://research.stlouisfed.org/fred2/graph/?id=BUSLOANS
    • 15. Change in Labor Cost per Unit of Output(Index Weight = 5.87%) • Represents the rate of change in labor costs for manufacturing firms compared to industrial output • Cyclical peaks in the six-month annualized rate of change typically occur during recessions, as output declines faster than labor costs • Data is collected in two parts: – Industrial production in manufacturing provided by the Federal Reserve – Employee compensation in manufacturing reported by the Bureau of Economic Analysis
    • 16. Unit Labor CostsHistorical Trend (2008 – 2012) Unit labor costs in nonfarm businesses increased 4.6 percent in the fourth quarter of 2012, the combined effect of a1.9 percent decrease in productivity and a 2.6 percent increase in hourly compensation.Source: http://www.bls.gov/news.release/pdf/prod2.pdf
    • 17. Average Duration of Unemployment(Index Weight = 3.61%)• The number of weeks those counted as unemployed have been out of work and looking for a job• Provided by the Bureau of Labor Statistics; data is inverted since this measure is higher during recessions (and vice-versa)• During a recession, the number of long-term unemployed will increase - how difficult is it for these workers to find a job?
    • 18. Average Duration of UnemploymentHistorical Trend (1965 – 2013) As of March 2013, the average length of unemployment was 37.1 weeks.Source: http://data.bls.gov/timeseries/LNS12300000
    • 19. Lagging Economic IndexHistorical Trend (1991-2013) Lagging Economic Index® (LAG)120110100 90 80 The Conference Board Lagging Economic Index® (LAG) increased 0.3 percent in March to 118.6 (2004 = 100), following no change in 70 February, and a 1.7 percent increase in January. 60 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: www.conference-board.org/data
    • 20. Historical Comparison of Business Cycle Indicators (1991 – 2010)120 Leading Coincident Lagging 3110 2 1100 90 80 70 60 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: www.conference-board.org/data
    • 21. Sources• http://www.investopedia.com/university/conferenc eboard/conferenceboard4.asp• www.conference-board.org/data• http://data.bls.gov/timeseries/LNS12300000• http://research.stlouisfed.org/fred2/graph/?id=BU SLOANS• http://www.investopedia.com/terms/b/bci.asp

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