South-Western College Publishing - Economics  
Economy Losing Steam
Subject Leading Indicators
Topic Productivity and Growth
Key Words

Leading Indicators and Recovery

News Story

The Conference Board, a business research group in New York City, compiles an index of the 10 leading economic indicators to forecast the direction of the U.S. economy. For the first time in a year, the measure of economic activity actually lost ground.

The ten economic indicators include average workweek, initial claims for unemployment insurance, new orders for consumer goods, vendor performance, new orders for capital goods, building permits for houses, stock prices, money supply, interest-rate spread, and consumer expectations. Changes in the index based on these ten variables provide a clue to policy makers on the future direction of the economy over the next three to six months.

The Conference Board said that 6 of the 10 indicators fell in the month of July: vendor performance, the interest rate spread, stock prices, average initial claims for unemployment insurance, money supply and new orders for capital goods. Economists say this reading indicates that the economy is likely to experience slower growth in the coming months.

"The latest decline in the leading index reflects a loss of forward momentum", said Conference Board economist Ken Goldstein. "There are growing concerns about the high costs of gasoline and milk, as well as worries about where economic growth will come from now that tax refunds have been spent and short-term interest rates are rising."

The remainder of the components of the index--building permits, consumer expectations, average workweek, and new orders for consumer goods--all rose, leading some to believe that the economy is not so bad. "There is a little bit of weakness out there," said Joel L. Naroff, an economic advisor in Holland, Pennsylvania, "and one month doesn't tell us we've made a turn."

Mr. Goldstein said the decline in the index was a reflection of several factors, including energy prices and worries about terrorism, on the economy. Time will tell whether some of the factors driving down the index are temporary and may turn back the other way. However, based on past experience, a fall in the index is an indication that the economy is losing steam and may continue to lose ground over the next three to six months.

(Updated October, 2004)

Questions
1.

Visit the website of the Conference Board at http://www.conferenceboard.org and read its history under the "about us" tab. Who formed the Board and why? Would you trust their data more than you would trust government reports about the economy?

2. While on the website, check out the status of consumer confidence over the last six months.
3. Over what time period does the index of leading indicators forecast the economy's health?
Source The Associated Press, "Leading Gauge of Economy Fell in July," New York Times Online, August 20, 2004.

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