South-Western College Publishing - Economics  
More Bad News for the Economy
Subject Economic Recovery
Topic Output, Income, and the Price Level
Key Words Economic Indicators, Jobless Claims, and Economic Recovery
News Story

The U.S. economic recovery has suffered yet another blow as evidenced by two important economic activity measures. Consumers and businesses alike apparently have serious concerns about the immediate future of the American economy. Consumers perceive that their wages and salaries are falling and businesses seem to be cutting back on spending, as they anticipate a soft spot in economic activity.

Business expectations are reflected in the closely watched Composite Index of Leading Economic Indicators, which fell 0.3 percent in August after the same decline in July. The Conference Board considers three consecutive months of declining index numbers to be a prediction of a weakening economy over the next three to six months. After more than a year of slow but steady growth, the decline in August marked the third straight month of decline.

The Labor Department reported that the number of U.S. citizens filing new claims for unemployment insurance rose, mostly because of the recent hurricanes in Florida. The 350,000 new claims are higher than the 338,000 that some analysts forecasted. These new claims all represent consumers with less purchasing power and a related decline in spending. "Consumers worry about their wages and salaries, which could limit spending. Businesses worry about their ability to raise prices and to cover rising costs," said Ken Goldstein, an economist for the Conference Board, a private research group based in New York.

Interest rates have begun to rise as the Fed gradually releases its grip on historically low rates. If the recovery stalls, businesses will be unable to pass on increased costs of borrowing through higher prices. With consumers worried about their wages and salaries, and businesses worried about profitability, the government may have to step in with some expansionary policies to keep the recovery going.

(Updated November, 2004)

Questions
1.

Under what conditions does the Composite Index of Leading Indicators predict a slow down in economic activity? That is, what are the indicators that comprise the composite index?

2. What period of time does the Composite Index of Leading Indicators cover? How much of a lag is there between the actual economic conditions monitored and the announcement of the Index figures?
3. Discuss how new claims for unemployment insurance tend to "limit spending," as suggested by Mr. Goldstein.
Source The Associated Press, "Jobless Claims Up in August; Economic Indicators Fall", The New York Times Online, September 24, 2004.

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