What are Business Cycle Indicators (CCIs)?
Business Cycle Indicators (CCIs) are a composite of leading, coincident, and lagging indices created by the Conference Board and used to forecast, date, and confirm changes in the direction of a country’s overall economy. They are published on a monthly basis and can be used to measure peaks and troughs in the business cycle.
Key points to remember
- Business Cycle Indicators (CCIs) are composite indices of leading, lagging, and coincident indicators used to analyze and forecast trends and turning points in the economy.
- Various public and private organizations collect and analyze data and economic statistics to build and monitor the BCI.
- The BCI should be used in conjunction with other statistics of an economy in order to understand the true nature of economic activity.
Understanding Business Cycle Indicators (ICC)
Economies generally do not grow at a constant linear or exponential rate, but rather experience periods of faster or slower growth as well as occasional episodes of outright decline in economic activity. These almost periodic fluctuations in economic activity, such as output and employment, are called business cycles. There is usually an increase in activity that peaks, or peaks, followed by a decline in output and employment until the economy hits a low, known as the hollow.
While past business cycles may show patterns that are likely to repeat themselves to some extent, the timing of peaks and troughs in business cycles is not always predictable. Understanding, predicting and overcoming the volatility of these cycles is a major line of research for economists, public decision-makers and private investors.
One of the main thrusts of this research has been the measurement and dating of trends and turning points in economic data and statistics. From this research, many sets of indicators were constructed.
History of economic cycle indicators
Wesley Mitchell and Arthur Burns of the National Bureau of Economic Research (NBER) were responsible for compiling the first set of BCIs and using them to analyze cycles of economic boom and bust during the 1930s. According to the NBER, there were a total of eleven business cycles between 1945 and 2009.
The US Department of Commerce began publishing BCI in the 1960s. The task of compiling and publishing the indicators was privatized in 1995, with the Conference Board responsible for the report.
Interpretation of business cycle indicators
Interpreting BCI involves more than just reading graphs. An economy is far too complex to be summed up in a few statistics. So, investors, traders and businesses should realize that it is unreasonable to believe that a single indicator, or even a set of indicators, always gives real signals and never fails to predict a turn in a economy.
BCIs are constructed by examining a wide range of government and private sector data, which is statistically correlated or logically linked to national macroeconomic performance.
Conference Board Business Cycle Indicators (ICCs)
One of the largest and most watched BIC sets is that published by the Conference Board. This includes a full set of advanced, coincident and lagging composite indices for various national economies.
Leading indicators of the business cycle
Leading indicators measure economic activity in which changes can predict the start of an economic cycle. Components of the Leading Indicator Index include average weekly working hours in manufacturing, factory orders for goods, building permits and stock prices. Changes in these metrics could signal a change in the business cycle.
The Conference Board notes that leading indicators receive the most attention because of their strong tendency to change before an economic cycle. Other components of the leading indicators include the Consumer Expectations Index, Average Weekly Unemployment Insurance Claims and the Interest Rate Spread.
Leading indicators are most meaningful, according to the Conference Board, when included in a framework that includes coincident and lagging indicators, because they help provide the statistical context necessary to understand the true nature of economic activity.
Lagging business cycle indicators
Lagging indicators confirm the trend predicted by leading indicators. Lagging indicators change after an economy has entered a period of fluctuation.
The components of the lagging indicator index highlighted by the Conference Board include the average duration of unemployment, the cost of labor per unit of manufacturing output, the average prime rate, the home price index. consumption (CPI) and commercial lending activity.
Coincident business cycle indicators
Coincident indicators are aggregate measures of economic activity that change as the business cycle progresses. Examples of coincident index components include the unemployment rate, personal income levels, and industrial production.