The economies of the world fluctuate over time; sometimes in sync with each other and, at other times, not so much.
Modern economic theory holds that these fluctuations occur in cycles, and based upon which economist you ask, there are either four or five different stages in a complete economic cycle. The five stages of a business cycle are growth (expansion), peak, recession (contraction), trough and recovery.
In the halcyon days of yore economists held that these cycles were extremely regular, with predictable durations, but today the prevailing opinion is that these business cycles are, in reality, irregular and vary in frequency, magnitude and duration.
Post-World War II business cycles have lasted from three to five years, while the longest recession on record was 34 months during the Great Depression.
Modern business cycles were first examined and measured in a 1946 book by Arthur Burns and Wesley Mitchell, entitled Measuring Business Cycles.
One of this duo’s key insights was that many economic indicators move together at various points in a business cycle.
In the growth phase, output goes up; employment also rises, while unemployment falls. Construction starts increase and inflation may go up as well if the economy overheats.
The converse is typically true in a recession, such as we have experienced recently.
Burns and Mitchell were the first to actually define a recession as a period in which a wide range of economic indicators fall for a sustained period, typically, at least a year.
Our government has defined a recession as occurring when our Gross National Product falls for at least two consecutive quarters.
Using that definition, our recession lasted from July 2008 through June 2009, since our GDP has risen steadily since that time.
The “official” unemployment rate is currently 6.2 percent, and has dropped fairly dramatically over the past 24 months, and that improvement does support the view that we are in a period of economic recovery.
However, when we factor into that mix those persons who have stopped looking for work, the percentage of potential eligible workers not working is currently 9.6 percent.
Economic indicators provide a method to measure business cycles based on current and future economic activity. In so doing, they are considered important measurement devices of the economy and where it is headed.
These economic indicators can be leading: predictors of future economic activity; coincident: confirming where we are; or lagging: confirmation of what actually occurred.
For the individual investor as well as the business community, it is vitally important to identify and quantify where our economy is headed.
In 1995, The Conference Board, an independently owned research organization, assumed from the U.S. Chamber of Commerce the responsibility for computing the various indexes of economic activity.
The Conference Board’s various indexes are nothing more than composite averages of between four and 10 economic indicators, and they are usually referred to as composite indexes.
The U.S. Leading Index is the most watched business cycle indicator, and is also referred to as the “composite index of leading economic indicators.” Obviously, a rising index signals a near term increase in economic activity, whereas a falling index usually means the opposite. Check out www.conference-board.org.
The Conference Board also publishes its coincident, as well as its lagging, index. The cyclical turning points in the coincident index generally take place at the same time as those reflecting current economic activity, while the turning points in the lagging index generally occur after those reflecting total economic activity.
Other economic indicators are the Consumer Price Index, the Consumer Confidence Index, and the Gross Domestic Product.
Well, what do these indicators reveal now? The leading index has risen sharply in the past year, as our economy continues to expand.
The coincident index rose 0.2 percent in May, 0.3 percent in June and 0.2 percent in July. The lagging index rose 0.2 percent in July, following strong up months in June and May.
The Consumer Confidence Index, surveying 50,000 households, has risen for four consecutive months, indicating that most Americans are bullish on the country.
The GDP growth rate in June of this year was 4.06 percent, up from 3.28 percent in March, but down from December of last year. Suffice it to say that our economy is expanding nicely.
So what does all this mean? In my view, our economy will continue to expand this year at a modest rate, and the bear may have to delay his hibernation schedule during the early winter. Translated, the stock market should continue to do well.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at firstname.lastname@example.org.
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