South-Western College Publishing - Economics  
Subject Slowing economy
Topic Fiscal Policy
Key Words Leading Indicators, Lagging Indicators, Soft Landing
News Story

How can you tell if the economy's slowing? One way would be to carefully examine a wide variety of data series, for example, leading indicators, lagging indicators and so on, using a multitude of quantitative tools. Alan Greenspan and other policy makers at the Federal Reserve subject these series, along with other confidential series that the public does not have access to, to just such an analysis. Another way is to pay attention to a variety of everyday indicators, such as the weight of your Sunday newspaper.

Retail Indicators. How heavy is your newspaper? The Sunday newspaper contains employment ads, home sales, department store and other retail advertising. A strong economy leads to lots of advertising and heavy newspapers. As the economy slows, so do the amount of advertising and the weight of your Sunday paper. As the economy slows it takes a longer time to sell houses and consumer gadgets. To gauge the economy's performance, pay attention to how long houses in your neighborhood remain on the market. When the economy is booming, houses stay unsold for just a few days. As the economy weakens, the time it takes to sell a house increases. Similarly, the expansion has fueled an appetite for technological goods like Palm Pilots, cell phones and computers. An economic slowdown will likely mean that the latest innovations will remain on the shelves.

Social Indicators. Watch crime data. There is evidence that the crime rate is inversely proportional to the unemployment rate. As the economy slows, crime rates rise. The birth rate, on the other hand slows when the economy slows. For example, the number of births rose 2 percent in 1998, a year of strong economic expansion. As the economy weakens, everyday discussions will focus more on political issues or sports and less on the stock market. Alan Greenspan will be increasingly portrayed in the media as the villain rather than as a hero.

Economic Data. How is the dollar doing relative to the yen, mark and Swiss franc? As our economy expanded relative to other industrial countries, foreign currency flowed into the U.S., boosting investment and raising the dollar exchange rate. A slowdown will lead to a weakening of the dollar. Are short-term interest rates higher than long-term rates? When interest rates are inverted, financial markets expect future short-term interest rates to be lower than current short-term rates. This can mean that demand for credit is expected to decrease, a sign that the economy is expected to slow.

(Updated August 1, 2000)

1. What are the phases of the business cycle?
2. How would you define the term "soft landing?"
3. What instruments are available to policy makers to influence the course of the economy? How could each of them be used to slow the economy?
Source Nicholas Kulish, "Vital Signs Offer Clues on Economy's Stamina," The Wall Street Journal, June 26, 2000.

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