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Difficulty: Very hardEconomic Indicators and Business Cycle Phases

An analyst is evaluating macroeconomic data to determine the progression of a business cycle peak. Place the following economic indicators in the correct sequential order based on when they typically reach their peak, starting from the earliest indicator to turn downward to the latest indicator to turn downward.

  1. 1Building permits for new private housing units
  2. 2Industrial Production Index
  3. 3Average prime rate charged by commercial banks
  4. 4Ratio of consumer installment credit outstanding to personal income

Answer

The correct sequence from earliest peak to latest peak is: Building permits for new private housing units, Industrial Production Index, Average prime rate charged by commercial banks, and Ratio of consumer installment credit outstanding to personal income.
Economic indicators turn at different stages of the business cycle. Building permits lead the economy (turning downward first). Industrial production coincides with aggregate output (turning downward at the economic peak). The prime rate lags the cycle as interest rates react post-peak. Consumer installment credit to income lags even further, as debt balances linger while personal income slows early in a contraction.

Step-by-Step Solution

1
Identify the economic classification (leading, coincident, or lagging) of each listed indicator.
Building permits = Leading indicator; Industrial Production Index = Coincident indicator; Average prime rate = Lagging indicator; Ratio of consumer installment credit to personal income = Lagging indicator.
Economic indicators are categorized by Conference Board standards based on whether their inflection points lead, coincide with, or lag the general business cycle turning points.
2
Place the leading indicator first in the sequence.
Building permits for new private housing units is positioned first.
Leading indicators signal future economic activity and reach their peak 6 to 9 months before the broad economy reaches its expansion peak.
3
Place the coincident indicator second in the sequence.
Industrial Production Index is positioned second.
Coincident indicators reflect current aggregate economic health and reach their peak at the exact top of the business cycle.
4
Differentiate between short-term lagging indicators and structural late-stage lagging indicators.
The prime rate turns shortly after the business cycle peak, followed later by debt-to-income ratios.
The average prime rate responds shortly after central bank rate cuts post-peak, whereas consumer installment debt relative to income peaks even later into the downturn as personal income drops faster than debt obligations are retired.

Key Concept

Classification and chronological turning points of leading, coincident, and lagging economic indicators during business cycle transitions.
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Topics

Economic Indicators and Business Cycle Phases

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