|What helps economists forecast the economy? Imagine you are presenting the index of the leading indicators concept to a small group of newly hired analysts. Discuss the index of the leading indicators.Is the Phillips curve a helpful predictor? Why or why not?
As a business person, how could you use this predictive macroeconomic information to help make business decisions? (Give specific examples.) Support your response with at least two scholarly and/or credible resources in addition to the text.
Economists rely on historical data and indicators such as inflation to predict the economy’s future. Various indicators considered in forecasting the future of an economy are also included in the leading economic indicators list. Examples of common indicators that economists use to predict the future include but are not limited to gross domestic product, the stock market, the unemployment rate, the consumer price index, and the interest rate.
The index of leading economic indicators is intended to predict future economic activity. It includes the following 11 indicators: Average workweek (manufacturing), initial unemployment claims, new orders for consumer goods, vendor performance, plant and equipment orders, building permits, change in unfilled durable orders, sensitive material prices, stock prices (S&P 500), real m2, and index of consumer expectations (Guerard, 2022). By combining data from different sources into a composite index, the index of leading indicators can offer a more comprehensive signal to help predict overall economic performance. It can predict the turning point in the economic cycle, estimate the fluctuation range of economic activities, and speculate on the trend of economic fluctuation (Wu et al., 2021).
The Phillips curve posits a trade-off between inflation and unemployment. The curve is not a helpful predictor because it misconstrues the relationship between inflation and unemployment as involving a direct causal influence of unemployment on inflation and vice versa, when in fact it is the changes in aggregate demand that cause changes in both unemployment and inflation. For instance, the Phillips curve posits that higher wages lead to higher product prices without considering how nominal aggregate demand impacts firms’ flexibility to raise product prices. Full employment could be associated with zero or limitless inflation.
Macroeconomic indicators have a significant influence on businesses. A business person could use the indicators to determine which country has the best profit potential based on the economy’s economic growth and changes in gross domestic product. This data can guide in expanding, for instance, from the US to a South American country with the greatest growth potential. Additionally, a business person could consider the interest rates charged by a country on the goods to determine potential profit margins. If Canada raised its interest rates further, it could discourage a US firm-owner from expanding there, because higher returns in a high-interest environment require more hard work to avoid having the profits eaten away by the bloated interest expenses.
Guerard, J. B. (2022). Mr. Geoffrey Moore and NBER Business Cycle Research. In The Leading Economic Indicators and Business Cycles in the United States (pp. 101-124). Palgrave Macmillan, Cham.
Wu, J. M. T., Li, Z., Herencsar, N., Vo, B., & Lin, J. C. W. (2021). A graph-based CNN-LSTM stock price prediction algorithm with leading indicators. Multimedia Systems, 1-20.
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