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Difficulty: Very hardEconomic Indicators and Business Cycle Phases

During an economic downturn following a period of yield curve inversion, a financial analyst is evaluating macroeconomic data releases to determine when an economic trough has occurred. Which of the following metric changes would provide lagging confirmation that an economic recovery has already established momentum?

  1. A sustained rise in the average prime rate charged by commercial banksAnswer
  2. B
    An upward trend in broad stock market indices such as the S&P 500
  3. C
    An increase in real personal income excluding transfer payments
  4. D
    An increase in new orders for nondefense capital goods

Answer

A sustained rise in the average prime rate charged by commercial banks
The average prime rate charged by commercial banks is a lagging economic indicator. Commercial banks typically adjust their benchmark prime rates only after broader interest rate adjustments and economic trends have matured, thereby confirming that an economic recovery has already taken hold.

Step-by-Step Solution

1
Identify the requested indicator timing classification
The question asks for a lagging indicator, which provides confirmation after a business cycle phase has already transitioned.
Lagging indicators trail overall economic changes and serve to confirm underlying trends.
2
Categorize each metric listed in the options
Stock market performance and capital goods orders are leading; real personal income is coincident; average prime rate is lagging.
Commercial banks adjust prime rates after market interest rates and Fed policies have already adjusted.
3
Select the matching lagging metric
The rise in the average prime rate charged by commercial banks is the correct answer.
It fulfills the criteria for lagging confirmation of a business cycle trough.

Key Concept

Economic Indicators and Business Cycle Timing
Estimated Time:1m 15s
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Topics

Economic Indicators and Business Cycle Phases

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