A macro research desk is mapping how financial and economic metrics respond as the overall economy reaches a peak and transitions into a contraction. Order the following four macroeconomic indicators based on their historical timing relative to the peak of the business cycle, starting with the earliest indicator to turn downward (most leading) and ending with the latest indicator to turn downward (most lagging).
- 1S&P 500 Index of common stock prices
- 2Personal income excluding government transfer payments
- 3Prime rate charged by commercial banks
- 4Ratio of consumer installment credit outstanding to personal income
Answer
The correct chronological sequence from earliest turning point to latest turning point is: S&P 500 Index of common stock prices, Personal income excluding government transfer payments, Prime rate charged by commercial banks, and Ratio of consumer installment credit outstanding to personal income.
The correct ordering places the leading indicator first, followed by the coincident indicator, and ending with the short-lag and long-lag indicators. Financial markets (S&P 500) discount future economic conditions and peak first. Real-time measures of output and income (Personal income excluding transfers) turn at the peak itself. Interest rate benchmarks (Prime rate) and consumer leverage metrics (Consumer installment credit to personal income) adjust only after the downturn is established, with debt-to-income ratios exhibiting the longest delay.
Step-by-Step Solution
Key Concept
Classification and relative chronological timing of leading, coincident, and lagging economic indicators across business cycle turning points.