South-Western College Publishing - Economics  
Economic Index Hits Record High
Subject Measuring Economic Act
Topic Economic Growth
Key Words

Index of Leading Indicators, Economic Growth, Employment, and Forecasting

News Story

More prosperity is just around the corner if the latest reading of the index of economic indicators is any hint. The index grew in December to a record high of 114.3. The index is a tool used by policy makers to forecast the future direction or real GDP. It is made up of ten important variables in the economy, including average workweek, initial claims for unemployment insurance, new orders or consumer goods, stock market prices, and building permits for houses. These and several other variables have been proved effective in providing advanced forecasts of economic activity.

None of the factors alone consistently predicts the future track of the economy, but taken as an index they have been relatively effective in predicting a change in direction of GDP. The rule of thumb for following the index is that three consecutive monthly declines or advances will be followed by a change in economic activity in the same direction.

The record high reading comes at a time when unemployment data are also favorable to a growing economy. "Both of these numbers are encouraging. They point to a continued upswing in the U.S. economy and, more importantly, improvement in a job market, which has been the missing link of the recovery story," said Lynn Reaser, chief economist at Banc of America Capital management. The news does seem to be good.

The index can best be thought of as a useful but not totally reliable indication of which way the economy is going and should be used with caution. "These numbers don't usually give you an indication of magnitude of growth but they do show direction," said Alexander Paris, economist for Chicago-based Barrington Research. Most economists see the numbers as a confirmation that the economy will continue to growth through 2004

(Updated March, 2004)

Questions
1.

The article mentions five of the variables that make up the Index of Leading Indicators, find the other five.

2. How would you use the index to formulate fiscal policy.
3. What are the potential pitfalls to the predicted growth in the economy?
Source Associated Press, "Key Economic Gauge Hits Record", Florida Today, January 23, 2004.

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