Economic Statistics Test EC509

What are four common misuses of economic statistics?

(1) According to EES the most common abuse of economic statistics is to apply them to situations for which they were never intended. For example some figures are reported as if they are important economic indicators when they actually are not. The example EES gives is personal income in current dollars. (2) To focus on or report nominal dollar values when the real, or inflation-adjusted, figures give a better picture of how the economy is changing. (3) The media sometimes treat a series as if it is a leading economic indicator when it is not. The example given by EES is a change in the general level of interest rates which usually lags economic activity. (4) The media report new releases of economic data without any accompanying information that will allow the reader or listener to to evaluate the significance of the numbers. For example if the DJIA increases by 40 points when the overall DJIA is around 1,000 this is a much different change than if it is around 10,000. Reports on new claims for unemployment compensation are another good example because they are rarely reported as a share of the labor force.

How often are comprehensive revisions of GDP made?

Annual revisions are made every July and comprehensive revisions, based on the economic census, every five years.

What are the 9 types of forecasts?

1) Point forecasts 2) Interval forecasts 3) Probability forecasts 4) Unconditional forecasts 5) Conditional forecasts 6) Event forecasts 7) Time series forecasts 8) Extrapolation forecasts 9) Weighted moving average forecasts

What are the 10 components of the index of leading economic indicators?

1. Average weekly hours of production workers in manufacturing 2. Average weekly initial claims for state unemployment insurance 3. Manufacturers' new orders for consumer goods and materials 4. Index of supplier deliveries—vendor performance diffusion index—this has now been replaced by the ISM index of New Orders 5. Manufacturers' new orders, nondefense capital goods (excluding aircraft?) 6. New private housing authorized by local building permits 7. Stock prices, 500 common stocks 8. M2 money supply in 2000 dollars—This has now been replaced by a leading Credit IndexTM developed by the conference board that consists of 6 components: 1) 2-year Swap Spread, 2) LIBOR 3 month less 3 month Treasury-Bill yield spread, 3) Debit balances at margin account at broker dealer, 4) AAII Investors Sentiment Bullish (%) less Bearish (%), 5) Senior Loan Officers C&I loan survey - Bank tightening Credit to Large and Medium Firms, 6) Total Finance: Liabilities - Security Repurchase. 9. Interest rate spread, 10-year Treasury bonds less federal funds rate 10. Index of consumer expectations (University of Michigan series)—This has been replaced by a simple average of (1) Consumer Expectations for the Economic Outlook 12 Months Ahead from the Reuters/University of Michigan survey and (2) Consumer Expectations for Business Conditions 6 Months Ahead from The Conference Board survey of consumer expectations.

What are the four ways a change in an index number can be reported

1. The absolute level of the index (146). 2. The absolute change in the level of the index from period to period (146 - 145 =1). 3. The relative percentage change from the previous period (1/145 = 0.69 percent). 4. An annualized projection of the current period percentage change ( [1+0.0069]12- 1 = 0.086 = 8.6% per year).

A building permit represents an intention to build rather than a decision to build. Why do intentions to build sometimes not translate into actual building activities? Looking at the thin line in Figure 4-2 that represents building permits, do you think these concerns affect the usefulness of building permits as an economic indicator?

A building permit is relatively inexpensive to obtain and is sometimes acquired for precautionary reasons - for example, "in case" the opportunity to build is right. Some regions of the country do not require building permits. People may also forego starting new homes after obtaining building permits if interest rates become unfavorable. Since the building permits and new housing starts series are so highly correlated these concerns do not appear to affect the usefulness of building permits as an economic indicator.

What is a diffusion index? What does it mean if a diffusion index is >50%? <50%?

A diffusion index is an index that represents the share of individual firms that report a change in behavior in some area of economic activity that is consistent with an increase in overall economic activity. Although the book says it focuses on the direction and magnitude of change as opposed to the absolute level of the series, it is better to say that it focuses on the direction and how widespread the change has been. Because it represents a "share" of firms, its value can range from 0 to 100 percent. If a diffusion index is greater than 50%, it is considered to be expanding because more than one-half of the firms (on average) are reporting a change that is consistent with an increase in economic activity. The more the number exceeds 50%, the more intense the expansion—that is the greater the share of firms experiencing an increase. When the index is less than 50%, the series is contracting.

Why are unemployment rate numbers issued since January 1994 not directly comparable with these issued before 1994

A revised CPS questionnaire was introduced in 1994. According to the footnote the change in the way the questions are asked caused the new unemployment numbers to be about ½% higher than under the old questionnaire. (However, I have a different source that states it is .1% to .3% lower under the new questionnaire.)

How well does the index of 10 leading indicators predict the beginning of a recession? The beginning of an expansion? Which would you prefer, an indicator that predicts a recession will begin in about 13 months, or one that predicts it will begin in about 2 months?

A sharp drop in the leading economic index has proceeded every recession since 1965. This drop in the index on average has occurred 8.4 months before the business-cycle peak. The range in these values is from 3 to 15 months. Although I would prefer an indicator that predicts a recession would begin in about 13 months rather than 2 months, such a long lead time leaves open the possibility that some "event" might occur that prevents the recession from occurring. (Hence the false alarms?).

Suppose a diffusion index is 55 one month, but 65 the next. How do you interpret this? Repeat for 55 one month and 52 the next.

A value of 55 indicates that 55% of firms are experiencing an increase in economic activity. So an increase in the index's value from 55 to 65 indicates that now a larger share of firms are experiencing an increase in economic activity. This implies the current expansion is becoming more intense. A decrease from 55 to 52 indicates that a smaller share of firms are experiencing an increase in economic activity. This suggest that the current expansion is becoming less intense or is starting to slow down. But because 52 is greater than 50, the economy is still expanding.

Look at figure 4-6. How would you classify new orders for durable goods as an indicator for business cycle peaks? Troughs?

According to Figure 4-6, the series of manufacturers' new orders for durable goods tends to act as a leading economic indicator for peaks and either slightly leads or is coincident with troughs.

Event forecasts

All the above examples (point, interval, probability, unconditional, and conditional) fall into this category, because they deal with a single event, a single outcome

What is the indicator status of DPI?

Although disposable income is a coincident indicator, its movements are so small (relative to other indicators) it is not a very valuable indicator.

Why is the CPI not a "cost-of-living" index?

Although it covers the cost of a fixed basket of goods, it is not a cost-of-living index because it does not take into account all of the things that would allow someone to maintain the same standard of living with a given level of expenditures.

Briefly discuss the Help-wanted online data series. Did it begin to decline before the most recent recession?

As shown by the thicker line in Figure 5-6, the help-wanted online data series began to decline before the business cycle peak in December 2007. It appears to be a little more volatile than the help-wanted ads series was.

According to Keynes, what sector of the economy is primarily responsible for instabilities in total spending?

Keynes believed that the investment spending sector (gross private domestic investment) of the economy was primarily responsible for the instabilities in total spending.

What is the indicator status of capacity utilization? Why is it not useful for forecasting?

Capacity utilization is leading for recessions and coincident for recoveries. It is not useful for forecasting because it is the ratio of two series (production and industrial capacity) and this apparently causes the lead times from its peak to the overall business cycle peak to be too variable. Changes in either series affect the value of capacity utilization. It is revised quite often and usually by the time the final revision is done future economic activity the lead times are too variable to be of precise value for forecasting.

are interest rates (especially the prime rate) a useful predictor of future economic activities?

Changes in interest rates affect some sectors of the economy, especially housing, automobiles, and to some extent stock prices, but changing interest rates are of little use in predicting future changes in the direction of the overall economy.

. To what does the term "new jobs created (or lost)" refer?

It is the difference between nonfarm employment (as measured by the establishment survey) in two consecutive months. So January employment minus December employment is new jobs created in January.

What is DPI or Disposable Personal Income? Why is it important? What keeps DPI from declining as much during recessions as one might otherwise expect?

DPI or Disposable Personal Income is the income residents of the United States have left over after paying their taxes. It is important because this is the income that can be used either for spending consumer goods and services or saving. DPI does not decline very much during a recession because transfer payments tend to increase as earned income declines. That is, things like food stamps and unemployment compensation (as well as the fact that taxes are lower) offset to some extent declines in PI.

When did the NBER announce that a recession had begun in March 2001? Was the economy still in a recession at the time of this announcement? When did they announce the end of the 2001 recession? Why do you think this is important?

During November 2001 the NBER announced that a recession had begun in March 2001. At this time the economy was still in a recession. During July 2003 they announced that the 2001 recession ended in November, 2001. The fact that it takes the NBER so long to announce business cycle turning points is important because it tells us that businesses have to rely upon their own resources if they want to know what economic conditions are like in a timely fashion. If an important investment decision was to have been made in January 2002, and whether or not the economy is currently in a recession was an important piece of information when making that decision, the investor could not get that information from anyone. He has to use his own judgment.

Look at figure 6-4 on page 103. What happens to employer costs during recessions

During a recession employer costs tend to decline. Since this indicator measures the change in the cost of labor it tells us that the compensation of labor on average declines during recessions.

Under what conditions can retail sales be used as a leading economic indicator?

During a recession retail sales will tend to begin increasing shortly before a recovery begins

Why does EES recommend postponing the refinancing of a loan if the economy has just entered a recession? Can you think of any practical problems with their advice?

EES recommends postponing the refinancing of a loan because interest rates usually go down during a recession and continue to go down well into the subsequent recovery. An important practical problem with this advice is knowing whether the economy is in a recession and knowing when interest rates have bottomed out. If you wait too long, the recession could end and you miss the chance to refinance at the lower rate. On the other hand, if you think the economy is in a recession, but it isn't, rates might not go down at all.

what is, perhaps, the most common abuse of economic statistics?

EES the most common abuse of economic statistics is to apply them to situations for which they were never intended. For example some figures are reported as if they are important economic indicators when they actually are not. The example EES gives is personal income in current dollars

What is the schedule the Department of Commerce uses to release its estimates of GDP?

Estimates are released around the last Friday of each of the three months following the end of the quarter. (a) Advance - released near the end of the first month after the end of the quarter; (b) Preliminary - released near the end of the second month after the end of the quarter; (c) Final - released near the end of the third month after the end of the quarter.

Extrapolation forecasts

Extrapolation from a monthly figure is often taken as a kind of time series forecast

How does private nonresidential fixed investment vary with overall business conditions? Summarize this figure in 2 or 3 sentences. What is the main problem with using the non-residential fixed investment series to track the economy?

Figure 4-1 shows that private nonresidential fixed investment tends to begin declining shortly before a recession begins, but usually does not begin to increase until after the recession ends. Sometimes, however, the decline associated with a recession does begin until several months after the recession begins. The main problem with using the nonresidential fixed investment series is that it comes from the quarterly GDP reports, which means we get it with a lag important enough that we might want to use something else

According to the text, why is the unemployment rate in many foreign countries understated relative to the U. S. rate? Does the reasoning in the text necessarily make sense?

First, to your instructor the reasoning does not make sense, but it is okay with me if you think it does. The text argues that the United States via the CPS tries to find the number of unemployed. In other countries the number of unemployed is counting by counting those who show up to collect an unemployment check. (I think that this does not cause the US data to overstated unemployment relative to other countries because in other countries people who do not wish to work for pay might be interested in getting an unemployment check.)

In what way do revisions of the underlying series affect the use of the index of leading indicators?

Frequent revisions of the monthly numbers are a major source of frustration. Whenever a new monthly composite index number is announced, revisions are also made to the six previous monthly numbers, primarily because the underlying individual component series are revised. Some forecasters follow the individual component series that make up the composite index in hopes that they can forecast the change in the index that forecasts the change in the economy. As a result, the general direction of the leading index is usually known and can be forecast before the official numbers are released. Despite some of these issues, the leading economic index is a popular forecasting device. It is on of the main tools in the forecaster's tool kit, and one of the most-watched statistical series in the economy today.

What is the relationship between GDP and GNP?

GDP includes income earned by foreign residents through their ownership of resources within the United States, while it excludes income earned by Americans as a result of foreign resources owned by residents of the United States. That is, GDP is a measure of output produced within the borders of the United States.

What is the relationship between GNP and NNP?

GNP minus the consumption of fixed capital (wear and tear on the capital stock) equals NNP

How many households does BLS survey each month? During which week of the month is the survey taken? To which week do the questions refer? (p. 84) (Compare with question 1, above.)

It surveys approximately 60,000 households in 2,000 counties and independent cities. It is taken during the week that includes the 19th day of the month and the questions refer to the week that includes the 12th day of the month.

If a person is classified as being employed, what criteria has he met?

He must have worked at least one hour for pay at the establishment or worked in his own business, or worked without pay in a family owned business.

What are the traditional interpretations of high inventories and low inventories? Write down a detailed description of the process which results after an unplanned increase in business inventories. (Note: This is a description of the Keynesian multiplier.)

High levels of inventories have been singled out as a cause of recessions or a major contributor to the deepening of a recessions, while low inventories are thought to be a sign that business activity is about to pick up. Businesses react to an increase in inventories by reducing their orders from suppliers, or by closing plants. Workers therefore begin to work fewer hours or lose their jobs entirely. This reduces the amount of income that workers have to spend, which causes a reduction in spending and may cause inventory levels to increase again. This process therefore repeats itself causing production to decline again and unemployment to rise, and consumer spending to drop. This sequence of events will send the economy into a recession. Eventually, businesses will succeed in reducing production to a point where inventories are too low. If inventories become too low or if consumer spending increases slightly, it will cause inventory levels to become too low. Businesses will then need to hire more workers which in turn will cause more consumer spending which in turn will reduce the level of inventories. This process of trying to replenish inventories helps pull the economy out of recession and put it on the path to recovery.

Probability forecasts

It's better to say that next year's GDP has an 85 percent probability of being between $14.95 trillion and $15.05 trillion.

Weighted moving average forecasts

If a particular series is subject to considerable fluctuation, a moving average with specific weights assigned to earlier periods can be used to smooth the data.

What does it mean to say a person is marginally attached to the labor force? What is a discouraged worker? Although counting these two groups as unemployed would increase the unemployment rate, would including them change the way one would interpret unemployment figures?

If someone has not looked for a job within the past 12 months but states that they want to work are said to be marginally attached to the labor force. A discouraged worker is someone marginally attached to the labor force who states that they have not looked for work during the past 12 months because of job market conditions. Your instructor does not think that including them among the unemployed would change the way that we interpret the numbers. Both the number of unemployed and the number of workers marginally attached to the labor force increase during recession and fall during recoveries.

Suppose four firms are surveyed for an index on supplier deliveries. Suppose 2 firms state that supplier deliveries are slower than last month, 1 firms states that there is no change in the speed of deliveries, while the fourth states that they are faster. a. What would be the value of the diffusion index? b. Does this suggest that the economy is becoming stronger or weaker? Explain. c. Suppose during the previous month the diffusion index for supplier deliveries was 48. How do you interpret the change from 48 to the number you calculated to answer part "a" of this question?

If supplier deliveries are slower, it means that economic activity is more intense. Suppliers tend to make deliveries faster only if they have fewer orders. When they are experiencing an increase in orders, it tends to take longer (on average) to fill each order. Hence we have one firm with a zero, one with a "½", and 2 with a "1" in calculating the index. Noting the numbers in parentheses are the numbers associated with the direction of change (1=expanding economic activity, ½=no change, 0=contracting economic activity), the index number = [2(1) + 1(.5) + 1(0)]/4 = 2.5/4 = 62.5%. This suggests that the economy is expanding, hence it is becoming stronger (because more than 50% of firms are experiencing slower vendor performance. Since during the previous month the number is only 48, the new number of 62.5 implies that most firms are experiencing an increase in economic activity, thereby implying that the economy is expanding, whereas it had been contracting during the previous month.

If the purchasing managers index is > 41.2%, what usually is happening to real GDP? If the index is >50%, what is happening to the manufacturing sector of the economy?

If the PMI is over 50%, then usually the manufacturing sector of the economy is expanding. If the PMI is greater than 41.2%, then usually the overall economy is expanding and this value of the index is thought to be most consistent with no change in real GDP.

Suppose the advance estimate of real GDP for the fourth quarter suggests that fourth quarter GDP grew faster than 3rd quarter GDP. How often does an observation like this continue to hold after the final revision of the data? (p. 18—This question is about the reliability of the advance estimate for whether GDP is growing faster or slower than the previous quarter.)

If the advance estimate of GDP states that output grew more rapidly than the previous quarter, then the final revision will verify this observation 75% of the time. (The direction of change indicated by the advance estimate is correct about 97% of the time.)

Suppose that because of a holiday, a week has only 4 working days. How will this effect new jobless claims during that week and the following week? What if there is severe snowstorm?

If there are only 4 days in a week in which to file an initial claim, then there will be a fewer number of claims filed, hence there will be more claims filed the following week. This can happen because of a holiday or a snowstorm.

What does the capacity utilization rate measure in principle? Is the capacity utilization rate, manufacturing designed to forecast future economic activity? If not, what is its purpose?

In principle the Fed measures capacity utilization by estimating both capacity and output. The resulting comparison of the level of industrial production to manufacturing capacity is the rate of capacity utilization. It is clearly a leading economic indicator for business cycle peaks.. Capacity utilization = index of industrial production divided by index of industrial capacity. It is designed to tell the Fed if the economy is "heating up" to the point where inflation night surge because of production bottlenecks. (That is, if the rate is high, the marginal cost curve of the typical firm is very steep.

What is the official name of the "new jobless claims" series? Why is a four-week moving average more useful than the weekly data?

Initial unemployment insurance weekly claims. Because the series is volatile on a week to week basis it is often better to use a four-week moving average.

Is it possible for economic actors "to think" the economy is in a recession even if it is not?

It is common for economic actors to think the economy is in a recession even if it is not. The main reason is that at the end of a recession—the business cycle trough—incomes are low relative to what they once were and the unemployment rate is relatively high. So when the economy is in the early part of a recovery, incomes are still relatively low and so to many economic actors it feels like the economy is in a recession. But if output now is growing, businessmen do not want to make decisions based on the idea that the economy is in a recession. Although there are official recession dates, they are not announced until the level of real GDP reaches the value it held at its most recent peak.

What is the release date of corporate profits after taxes in constant dollars?

It is released 45 days after the close of the quarter and 45 days later a revision is released.

What is the indicator status of new jobless claims as suggested by the box on the bottom of page 91? Does the figure on page 90 support this interpretation?

Leading for recessions (or leading for peaks) and coincident for recoveries (or coincident for troughs).

Approximately what share of GDP is represented by manufacturers' new orders, durable goods industries? Who is the purchaser of these durable goods?

Manufacturers' new orders, durable goods industry represents about 6 percent of total GDP. The purchasers of these durable goods are the business sector.

In Figure 2-4 there is a spike in DPI for December of 1992. What do economists think caused this spike?

Many individuals feared that President Clinton would urge Congress to pass legislation that would raise tax rates for the year 1993, so that they arranged to have their bonuses paid in December, 1992 instead of waiting until 1993.

Point forecasts

Most common, often wrong because of outcomes are unlikely to reach the predicted point precisely.

What is the relationship between NNP and NI?

NNP minus indirect business taxes equals NI (national income). NI is the sum of employee compensation, corporate profits, proprietors' income, rental income and net interest payments in the economy. National income is aggregate income earned by Americans measured at factor prices, whereas GNP is the income of Americans measured at product prices.

What is the relationship between NI and PI?

PI equals NI minus retained earnings of corporations and contributions for social insurance payments (social security) plus other payments to households like unemployment compensation, welfare and any other aid. It is a measure of income that accrues to households.

Is personal income a useful predictor of future economic activities?

Nominal personal income almost always goes up, even when the economy is in recession. So, usually, personal income is not a good predictor of future economic activity.

When has the "original" index of 11 leading economic indicators predicted recessions that did not occur? Briefly discuss.

One false prediction was in 1966 when the index turned down for nine consecutive months and the economy still continued to grow. Some economists think that heavy spending on the Vietnam War may have prevented a recession during this period. Another false prediction was in March 1984 when the index turned down for seven consecutive months. Economists with similar views to the above think that the massive federal budget deficit—to the tune of $200 billion annually between 1985 and 1986—prevented a recession this time as well. Later, a series of declines in early 1995 presented another puzzling period for the leading index. At the time, it seemed that the index had peaked, but strong economic growth in 1996 suggests that 1995 was a relative, rather than an absolute, peak.

What is the most stable component of the economy? Does it tell us very much about the state of the economy? Why? Now think about the idea of the permanent income hypothesis. Is your explanation consistent with the permanent income hypothesis?

Personal consumption expenditures is the most stable component of real GDP (or of the economy) and therefore it usually cannot tell us very much about the state of the economy. Notice from a plot of PCE (in constant dollars on page 97) that it does not vary with economic conditions as much as many other series that or more volatile (such as the unemployment rate in Figure 5.4 on page 87).. According to the permanent income hypothesis personal consumption expenditure only decreases if permanent income decreases. Hence, if changes in total income during a recession do not reflect a change in permanent income, then consumption will not decline by as much as income during a recession. Hence real personal consumption expenditure will only change if there is change in permanent income, such as might occur if the rate of income growth changes. So the explanation above is consistent with the permanent income hypothesis.

What is the labor productivity crisis?

Productivity falls off at the end of most expansions. This occurs because employers tend to hire less skilled and less productive workers when production is high and unemployment rates are low.

What is the indicator status of corporate profits? (See box on page 105.) What was the original purpose of this series? Why does it make sense to presume that profits will decline well in advance of a business-cycle peak?

Profits lead recessions but are coincident with recoveries. The purpose of the series, corporate profits after tax, is to provide information about the general health of the corporate sector.

Why is retail sales more volatile than personal consumption expenditures?

Retail sales is more volatile than personal consumption expenditures because the largest component of consumption is housing services, which is not a component of retail sales.

Time series forecasts

Series of forecasts that march into the future by convenient time steps- months, quarters, or years- are much more complicated than a single-event forecast.

Do you think new-jobs-created is a leading economic indicator? coincident? Briefly explain.

Since new-jobs-created is a change in an economic variable, we would expect it to be a leading economic indicator.

What are the 5 series that the ISM constructs and then combines to form the PMI?

Supplier deliveries, production, new orders, inventories of purchased materials, and employment.

Write two paragraphs that discuss the pros and cons of taking the time to read the beige book.

The Beige Book contains information gathered by regional Federal Reserve Banks used by the Open Market Committee of the Fed when they meet to discuss monetary policy. It includes anecdotal information. One advantage of looking at it is that allows one to see some of the information that the Fed uses. The disadvantage is that it is time consuming to read and looks backwards. One advantage of looking at time series graphs is that a picture is worth a thousand words. It gives you information quickly and you know which series tend to be leading economic indicators.

What share of the population does the CPI for all urban consumers cover? The CPI for urban wage earners and clerical workers?

The CPI for all urban consumers covers a basket of goods typical of what is purchased by 87% of the population, while the one for wage earners and clerical workers covers about 32% of the population.

What is the official name of the series that measures labor productivity for all workers? How is labor productivity defined by the BLS?

The official name of the series that measures labor productivity is output per hour of all persons, more commonly known as labor productivity. The official BLS definition of business or labor productivity is productivity = Index of real dollar output/Hours of labor input.

Who compiles the purchasing manager's index? What types of firms are surveyed and what topics are covered?

The Institute for Supply Management compiles the purchasing manager's index. The PMI is the major component of the ISM's monthly Report on Business which surveys manufacturing firms on a number of topics including production, new orders, inventories of purchased materials, employment, and supplier deliveries.

Who determines the official turning points of the business cycle?

The National Bureau of Economic Research determines the turning points of the business cycle.

Do you think the PMI is a leading economic indicator or a coincident indicator? Explain.

The PMI is a diffusion index, which means that it also has the properties of a leading indicator. By looking at Figure 3-1, one can see that the index peaked, with highly variable lead times, well in advance of every recession. Likewise, the index usually hit a minimum just before the recovery began. Diffusion indices are always leading economic indicators. The reason is that the survey asks in what direction are things changing. For example, are supplier deliveries slower, the same or faster? Suppose the economy reaches a business cycle peak during September and economic activity in October is same as was in September. Any diffusion index for October theoretically will be 50% (no change in economic activity for the average firm). But if activity expanded from August to September, the value of the diffusion index in September must have been greater than 50%. Hence diffusion indices in theory should always be declining during the month of a business cycle peak. Because we can make a similar argument for troughs, diffusion indices are leading economic indicators for both business cycle peaks and troughs.

What three things does the authors of the text believe you should remember about inventory statistics?

The author believes that we should remember that 1) any series that reports the level of inventories tends to act as a coincident or lagging indicator while changes in the level of inventories tend to be a leading indicator. 2) because monthly percentage changes are highly variable, one should use a moving average of the change in inventories. 3) as difficult as inventories and changes in inventories are to track, they are nevertheless important because inventories are one of the most volatile components of real GDP.

The conference board also publishes an index of lagging economic indicators. Some business economists like to look at the ratio of the index of leading indicators to the index of lagging economic indicators. See if you can find data on these two series (for example from nexis/lexus or Bloomberg's) in the library and plot it. What do you think?

The basic idea is that the index of lagging indicators should still be increasing when the leading indicators start to decline prior to a recession. They should still be decreasing when the leading indicators begin increasing before an expansion begins.

How important an indicator of overall activity is the IIP today as compared with, say, 1950? (Hint: Were services as important in 1950 as today?)

Today the IIP accounts for about 30% of GDP with services accounting for 60%. Since services were not as important in 1950, the IIP was a more important indicator in 1950.

The civilian labor force.

The civilian labor force consists of members of the civilian non-institutional population who either want to be or are working for pay

Define the civilian non-institutional population

The civilian non-institutional population is the population that is physically and legally able to work. It consists of all people aged 16 and over who are not confined to an institution of some sort (hospital, home of the elderly, prison) and who are not in the armed forces.

During the fourth quarter of 2008 and the first quarter of 2009 real GDP declined at a rate of over 6% per year. Which components of GDP were most responsible for these declines? Although services are the largest component of personal consumption expenditures, why do you think they showed little change from quarter to quarter in Table 2-4?

The component of GDP most responsible for these declines was gross private domestic investment, especially fixed investment (but also the change in inventories for the first quarter of 2009). Exports and the consumption of goods were also important during fourth quarter of 2008. The main thing to note is that it is the product and sale of investment type items that tends to decline during recessions. Personal consumption expenditures on services do not fluctuate a great deal because consumption expenditures on services depend primarily on permanent income rather than current income. Consumption expenditures on both nondurable and durable goods (with the exception of food) to a very large extent can be postponed until the recession ends.

What makes the index of durable consumer goods particularly useful for identifying recessions?

The durable goods portion of the index is the more volatile component. This is because the purchase of durable goods can usually be postponed if consumers find themselves short of purchasing power. When we are in a recession, people stop buying luxury items that they do not necessarily need. Therefore, this is a good indicator of a recession. Another approach to answering this question uses the permanent income hypothesis. If an individual expects his income in the future is going to be lower than what he once thought, he probably will reduce is spending on durable goods (keeping old vehicles and household appliance a little bit longer than otherwise). If enough people start to believe that their incomes in the future are going to be lower than they once thought, a lot of people will do the same thing, suggesting that the decision of households to reduce spending on durable goods is a sign that economic activity elsewhere is declining.

What is the difference between the establishment survey and the household survey?

The establishment survey is a survey of employers, while the household survey is a survey of households. In the establishment survey someone working for more than one firm might be counted twice (or three times if he has three jobs), whereas this does not happen with the household survey. For this reason, when the economy expands, the establishment survey might show employment growing faster because someone who gets a second job will be counted as a new worker, whereas his employment status in the household survey does not change.

What are the major market groups and the major industry groups into which the overall Index of Industrial production is sub-divided?

The major market groups are Final Products (subdivided into consumer goods, business equipment and defense and space equipment), non-industrial supplies (consisting of construction supplies and business supplies) and materials (energy and nonenergy. The major industry groups are manufacturing (durable and nondurable), mining and utilities.

Number of people employed

The number or employed are members of the civilian labor force who are working for pay or profit

Does the index of labor productivity exhibit any cyclical behavior? (page 39) Briefly explain. For what purpose is the index most useful?

The index exhibits some cyclical behavior, with productivity falling off at the end of most expansions. But labor productivity measures are most useful if one is interested in explaining the factors that contribute to the long-term economic growth.

What was the Fed's main motivation in designing the index of industrial production? What share of GDP is from the production of goods?

The index is designed to give the Fed a quicker reading on the overall health and activity of the manufacturing sector of the economy. This is important because of the Fed's responsibility for monetary policy, and because of delays in reporting final GDP. Industrial production covers the goods portion of GDP and amounts to about 30 percent of total output- with services representing about 60 percent of output and structures the remaining 10 percent.

Who produces the index of consumer expectations? The consumer confidence survey? Which one is in the index of leading economic indicators? Which index is more easily accessible?

The index of consumer expectations is produced by the Institute for Social Research at the University of Michigan, while the consumer confidence index is produced by the Conference Board. The index of consumer expectations is a component of the index of leading economic indicators. Although the two series are equally useful, the conference board does issue a press release each month, which means it is mentioned more often in the press than the ISR series.

The Fed's Beige Book is a compilation of anecdotal evidence about economic conditions in the various districts of the Federal Reserve System. What do you think the last two pages of chapter 1 suggest about the value of reading the Beige Book?

The last two pages of chapter one suggest that the value of reading the Beige Book is to help us develop a "feel" for business conditions, which should be extended to our interpretations of the statistical series.

Does the process you just described suggest that inventories should be a lagging economic indicator? Explain why or why not? What does Figure 4-3 suggest?

The process described above implies that the level of inventories should be a lagging economic indicator for recessions because the recession will have already begun before the level of inventories begins to decline. Figure 4-3 suggests, the level of inventories tends to turn down either as a recession begins or shortly afterwards. (In particular note the delay in the decrease in inventories during the 2008-09 recession.)

Why would you expect the ratio of inventories to sales to increase once a recession has begun? Do you think it will increase before a recession? Why or why not? What does figure 4-5 suggest?

The ratio of inventories to sales tends to increase after a recession has begun because households and firms reduce their spending as a recession begins. However, if spending declines before the recession begins, inventories will increase while sales are decreasing. Hence the ratio will start increasing before the recession begins. The ratio of inventories to sales increases before a recession because the increase in inventories is a direct result of the decrease in sales. Therefore, as sales decline, inventories begin to climb. (Sales tend to decline before a recession begins.) Figure 4-5 suggests, the ratio of inventories to sales is a leading indicator for recessions because it turns up well before a recession arrives. It appears to be coincident for all business-cycle troughs in the figure except for that for the 2008-09 recession.

6 ways that a hypothetical increase in total sales from $800 to $840 billion (over a 12-month period) can be reported

The six ways that a hypothetical increase in total sales from $800 to $840 billion dollars can be reported are: 1. The final current or nominal dollar value of total sales ($840 billion). 2. The change in the current or nominal dollar value of total sales ($40 billion). 3. The final chained, constant, or real dollar value of total sales ($738 billion in 2000 dollars). 4. The change in chained, constant, or real dollar value of total sales ($18 billion in 2000 dollars). 5. The percentage change in the current or nominal dollar sales (5.0 percent, or $40 billion/$800 billion). 6. The percentage change in chain weighted, constant, or real dollar sales (2.5 percent, or $18 billion/$720 billion in 2000 dollars).

Does the IIP (the total index of industrial production) usually behave as a coincident indicator? What about the index for the production of nondurable consumer goods? Durable consumer goods? Can you think of any reason why they behave differently?

The total index of industrial production usually behaves as a coincident indicator, meaning that the peaks and troughs in the series occur at approximately the same time that the economy as a whole has its peaks and troughs. This is to be expected, since overall industrial production represents such a large proportion of total GDP and durable goods and investment goods are the components of GDP that fluctuate the most. When the durable and nondurable goods series are presented separately, it is evident that the durable goods portion of the index is the more volatile component. They behave differently because the purchase of durable goods (cars, boats, etc.) can usually be postponed if consumers find themselves short of purchasing power.

Does the unemployment rate lead or lag recessions? What about recoveries? How rapidly does the unemployment rate change when a recession begins? When a recovery begins?

The unemployment rate tends to lead recessions but lag recoveries. When a recession begins it increases fairly rapidly, but tends to decline slowly when the recession ends.

How many different product groups are included in the CPI-U? How many expenditure classes are there? (NB: this is all the expenditure classes, the number in a group varies across groups.) How many individual items are there?

There are 8 major product groups, 70 expenditure classes and 80,000 individual items.

How many business establishments are surveyed by the Bureau of Labor Statistics (indirectly) to gather the data contained in the Current Employment Statistics survey? What week of the month does the survey cover? When the final estimates are released (three months later) what share of survey forms have been processed?

They survey approximately 390,000 businesses. The survey covers the week that includes the 12th. When the final estimates are released more than 90% of the business establishments have responded.

Who collected and released the index of the help-wanted advertising in newspapers? Did it tend to lead recessions (or business cycle peaks)?

This index was collected by the Conference Board. It tended to lead business cycle peaks, but lag recoveries.

To what questions does a surveyed person have to answer "yes" to be considered employed? What criteria does a person have to meet to be considered unemployed?

To be considered employed the person has to answer yes to "did you do any work for pay", or yes to "did you do unpaid work in the family business or farm (at least 15 hours if unpaid)", or yes to "Did you have a job last week (including one from which you were temporarily absent)." To be considered unemployed they must have been available for work, have done no work for pay or profit, and have taken specific actions during the past 4 weeks to find a job.

In spite of their good record as leading indicators, why should one be cautious in his interpretation of changes in the index of building permits and new housing starts?

Volatility is the major reason that one should be cautious of changes in the indices of building permits and new housing starts. Since permits are relatively inexpensive to obtain, a builder may have a backlog of building permits and may be waiting for more favorable weather to begin construction. Also, monthly double-digit changes are not infrequent, and a large change in one direction is often followed by a sharp reversal the next month. Monthly revisions of the initial preliminary estimates often include changes in the direction of movement and the magnitude. Hence a monthly change might not mean much, but changes in the same direction several months in a row are certainly indicative of a change in the level of economic activity.

Write a short description about how GDP is measured (or estimated)

We must find out how many goods, services, and structures are produced in a year, multiply them by their prices, and add them all up. This information is gained through many sources including: 1) Economic census that covers 7+ million businesses that is published every 5 years- covers more than 95% of GDP expenditures 2) Income derived from the Quarterly Census of Employment and Wages conducted by BLS 3) IRS provides estimates for corporate profits 4) Census bureau: shifts in consumer spending patters 5) Customs bureau provides data on exports/imports 6) rental value of owner-occupied housing Quarterly estimates--Annual revisions--5-year revisions (benchmarks)

Why does the process you described suggest that changes in inventories will be a leading indicator?

When inventories become too high, the rate at which they are increasing will begin to fall before the level of inventories begins to fall. That is, firms cut back on production when inventories are too high, which means that inventories begin to grow less rapidly. This tends to occur before the actual peak in economic activity, so the change in inventories is a leading economic indicator. Figure 4-4 suggests that monthly percentage changes in the level of inventories tend to be a leading economic indicator for recessions. This is more evident if one uses the 6-month moving average rather than the month-to-month changes. But note that the change in inventories did not begin to decline before the 2008-09 recession.

Why is the series on monthly wholesale sales not useful as an economic indicator?

Wholesale sales does not consistently lead or lag business cycle turning points. For example, if you look at Figure 6-3, it leads the 2001 recession, but lags the 2008 recession. Another problem with it is that the revised data are released 12 weeks after the end of the reference month, whereas initial retail sales are released 2 weeks after the reference month and revised ones 6 weeks afterwards. Both of these are considerably faster than the wholesale sales data.

What are the four major expenditure components of GDP?

a. Consumption - durable goods, nondurable goods and services b. Investment - fixed (nonresidential, residential) and change in private inventories c. Net exports - exports and imports d Government - federal (national defense, nondefense) and state and local

Unconditional forecasts

all of the above (point, interval, and probability) fall into this category because they are not premised on some second event taking place.

number of people unemployed

are those who currently are not working for pay or profit (but who desire to do so).

Conditional forecasts

gives the forecaster an out if the forecast turns out to be wrong, but it also makes the forecast a bit less useful to the user.

Interval forecasts

it is better to say that next year's GDP will be $15 trillion, give or take $50 billion.

What two series designed to track housing activity (residential fixed investment) receive the most attention in the press?

the number of new building permits issued and statistics on the number of new homes started