Business Cycles and the Leading Indicators by Rabia06

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									   Business Cycles
and Leading Indicators




    businesscycle.com
     +1.212.557.7788
          The Classical Business Cycle
 “Business cycles are a type of fluctuation found in the
 aggregate economic activity of nations that organize
 their work mainly in business enterprises: a cycle
 consists of expansions occurring at about the same time
 in many economic activities, followed by similarly
 general recessions, contractions, and revivals which
 merge into the expansion phase of the next cycle; this
 sequence of changes is recurrent but not periodic; in
 duration business cycles vary from more than one year
 to ten or twelve years; they are not divisible into shorter
 cycles of similar character with amplitudes
 approximating their own.” -- Burns and Mitchell, 1946
© Economic Cycle Research Institute
            Recessions and Expansions
 A recession is the phase of the business cycle marked
 by pronounced, pervasive and persistent declines in the
 key measures of aggregate economic activity, i.e.,
 output, employment, income and sales.

 An expansion is the phase of the business cycle marked
 by pronounced, pervasive and persistent increases in
 the key measures of aggregate economic activity, i.e.,
 output, employment, income and sales.

 Alternating expansions and recessions make up the
 business cycle.
© Economic Cycle Research Institute
   The Recession as a Vicious Cycle
 A recession occurs when a decline in some measure of
 aggregate economic activity sets off cascading declines
 in the other coincident measures of activity. Thus, when
 a dip in sales causes a drop in production, triggering
 declines in employment and income, which in turn feed
 back into a further fall in sales, a vicious cycle results
 and a recession ensues. This domino effect of the
 transmission of economic weakness from sales to output
 to employment to income, feeding back into further
 weakness in all of these measures in turn, is what marks
 a recessionary downturn.

© Economic Cycle Research Institute
  The Expansion as a Virtuous Cycle

   At some point, the vicious cycle is broken and an
   analogous self-reinforcing virtuous cycle begins, with
   increases in output, employment, income and sales
   feeding into each other – the hallmark of a business
   cycle expansion.




© Economic Cycle Research Institute
         How the Virtuous Cycle Works




© Economic Cycle Research Institute
          Turning Points:
 Business Cycle Peaks and Troughs
 Because recessions can be characterized as vicious
 cycles and expansions as virtuous cycles, the transition
 points between the vicious and virtuous cycles, based
 on the consensus of the coincident indicators (output,
 employment, income and sales), properly mark the start
 and end dates of recessions (peaks and troughs).

 That is also why “two down quarters of GDP” is not an
 adequate definition, nor a proper criterion, for a
 recession. In fact, the 2001 U.S. recession was not
 marked by two successive declines in quarterly GDP.
© Economic Cycle Research Institute
          Business Cycle Chronologies
 The historical dates of U.S. business cycle peaks and
 troughs are thus based on the consensus of the dates of
 the peaks and troughs in the broad measures of output,
 employment, income and sales.

 For 19 other economies, ECRI maintains business cycle
 peak and trough dates based on the same approach.

 The up-to-date list of business cycle dates for 20
 countries including the U.S. is available here:
 To view business cycle chronologies go to businesscycle.com

© Economic Cycle Research Institute
                             Deviation Cycles
 Periods of declining economic activity became less
 frequent in Western Europe, as it saw strong growth in
 the decades after World War II. Thus, classical business
 cycle recessions (i.e., contractions) became rare.

 In response, deviation cycles (also known as growth
 cycles), based on alternating periods of above-trend and
 below-trend growth, gained popularity.

 But because the current trend is hard to estimate in real
 time, deviations cycles are problematic to use for real-
 time monitoring of the economy.
© Economic Cycle Research Institute
     Growth Rate Cycle Chronologies
 Growth rate cycles are made up of alternating periods of
 rising and falling economic growth.

 They are based on the growth rates of the coincident
 indicators whose levels relate to business cycles, and
 do not rely on estimation of the current trend. Hence,
 growth rate cycles, along with business cycles, are
 useful for real-time monitoring of the economy.

 For this reason, ECRI maintains growth rate cycle
 chronologies for 20 countries:
 To view growth rate cycle chronologies go to businesscycle.com
© Economic Cycle Research Institute
    Business Cycles and Growth Rate Cycles




© Economic Cycle Research Institute
    Turning Points are Hard to Predict


                                      Forecast Error

                                                                   Target




                                                   Consensus Forecast

© Economic Cycle Research Institute
   Accuracy of Consensus Forecasts


        “The record of failure to predict recessions
        is virtually unblemished.”
                                      - IMF study (2001)




© Economic Cycle Research Institute
     Leading Indexes can Time Turns
                 Lead

                                      Leading Index




                                                      Target




© Economic Cycle Research Institute
         Different From the Consensus
        “In a survey in March 2001 95% of
        American economists said there would
        not be a recession …
        ECRI is perhaps the only organisation to
        give advance warning of each of the past
        three recessions; just as impressive, it
        has never issued a false alarm.”
                   - The Economist (Jan. 2005)

© Economic Cycle Research Institute

								
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