What Are Business Cycle Indicators (BCI)?
Business cycle indicators (BCI) area composite of leading, coincident, and lagging indexes created by the Conference Board to forecast, date, and confirm changes in the direction of the overall economy of a country. They're published monthly and can be used to measure the peaks and troughs of the business cycle.
Key Takeaways
- Business cycle indicators (BCI) are composite indexes of leading, lagging, and coincident indicators.
- BCI is used to analyze and predict trends and turning points in an economy.
- Various public and private organizations collect and analyze economic data and statistics to construct and track BCI.
- BCI must be used in conjunction with other statistics of an economy to understand the true nature of economic activity.
Understanding Business Cycle Indicators (BCIs)
Economies don't tend to grow at a consistent linear or exponential rate. They experience periods of faster or slower growth as well as occasional episodes of outright decline in economic activity. These quasi-periodic fluctuations of economic activity, such as production and employment, are known as business cycles.
Past business cyclesmayshowpatterns that are likely to be repeated to some degree but the timing of peaks and troughs in business cycles isn't always predictable. Understanding, anticipating, and overcoming the volatility of these cycles is a major focus of research by economists, public policymakers, and private investors.
There's usually a rise in activity that reaches ahigh point or peak followed by a decline in output and employment until the economy reaches a bottom that's referred to as a trough.
One prominent avenue of this research has been the measurement and dating of trends and turning points in economic data and statistics. Numerous sets of indicators have been constructed from this research.
History of Business Cycle Indicators
Wesley Mitchell and Arthur Burns at the National Bureau of Economic Research (NBER) were responsible for compiling the first set of BCI and using the data to analyze economic boom and bust cycles during the 1930s.
There were a total of 12 business cycles between 1945 and 2009, according to the NBER.
The U.S. Department of Commerce began publishing BCI in the 1960s. The task of compiling and publishing the indicators was privatized in 1995 and the Conference Board became responsible for the report.
Interpreting Business Cycle Indicators
Interpretation of BCIinvolves much more than simply reading graphs. An economy is too complex to be summarized with just a few statistics. Investors, traders, and corporations must realize that it's unreasonable to believe that any single indicator or even a set of indicators always gives true signals and never fails to foresee a turning point in an economy.
BCI are constructed by looking at a wide range of government and private sector data that are statistically correlated with or logically related to national macroeconomic performance.
The Conference Board Business Cycle Indicators
One of the most prominent and intensely watched sets of BCI is published by the Conference Board. This includes a full set of composite leading, coincident, and lagging indexes for various national economies.
Leading Business Cycle Indicators
Leading indicatorsmeasureeconomic activity in which shifts may predict the onset of a business cycle. Components of the index of leading indicators include average weekly work hours in manufacturing, factory orders for goods, housing permits, and stock prices. Changesin these metricscould signal a shift inthe business cycle.
The Conference Board notesthat leading indicators receive the most attention because of their strong tendency to shift in advance of a business cycle. Other leading indicator components include the index of consumer expectations, average weekly claims for unemployment insurance, and the interest rate spread.
Leading indicators are most meaningfulwhen they're included as part of a framework that includes coincident and lagging indicators, according to the Conference Board. Theyhelp provide the necessary statistical context for understanding the true nature ofeconomic activity.
Lagging Business Cycle Indicators
Lagging indicators confirm thetrend that leading indicators predict. Lagging indicators shiftafter an economy has entered a period of fluctuation.
Components of the index of lagging indicators highlightedby the Conference Board include the average length of unemployment, labor cost per unit of manufacturing output, the average prime rate, the consumer price index (CPI), and commercial lending activity.
Various factors of unemployment are components of all three Conference Board business cycle indicators.
Coincident Business Cycle Indicators
Coincident indicators areaggregate measures of economic activity that shift as abusiness cycle progresses. Examples include the unemployment rate, personal income levels, and industrial production.
Are There Other Types of Indicators?
The Consumer Price Index weighs the average price of goods and services to measure changes in the cost of living and is a component of the index of lagging indicators. Moving average (MA) is an indicator used in the stock market to identify the direction or trend of a specific stock.
What Is a Business Cycle?
A business cycle is the up-and-down flow of economic activity over a given time. Activity in consumption, employment, investment, and other indicators measure overall economic activity.
What Are the Stages of a Business Cycle?
A business cycle isn't complete unless and until it experiences a boom and a contraction in chronological order. The typical stages of a business cycle are expansion, peak, contraction, and then recession.
The Bottom Line
Business cycle indicators analyze trends and turning points in an economy. They can predict trends and turning points as well. Cycles tend to be volatile and unpredictable. Understanding and being able to gauge them through various indicators can be a critical skill for businesses and investors.
Correction–May 1, 2024: This article has been updated to clarify that unemployment is a component of all three Conference Board business cycle indicators.
