Marta owns a residential construction firm and is deciding whether to commit $400,000 of retained earnings to a second crew and a new fleet of vehicles. She tells her planner she does not want to expand into the front edge of a downturn, and asks which single published economic measure would give her the earliest warning of a turn in the business cycle. Which measure should the planner point her to?
- ABuilding permits issued for new private housing units, which is a leading indicator and turns before the wider economy does Correct
- BThe civilian unemployment rate, which is a lagging indicator and turns after the wider economy does
- CThe average duration of unemployment in weeks, which is a lagging indicator and turns after the wider economy does
- DThe index of industrial production, which is a coincident indicator and turns with the wider economy
Why A is correct: Permits are filed months before construction starts and before the resulting output, employment and income appear anywhere else, which is why they sit in the leading index and give Marta the earliest signal for a capital commitment.
Why B is wrong: It is the most visible labour measure and it does move with the cycle, but employers cut hours and hiring before they cut heads and rehire only once a recovery is established, so the rate confirms a turn that has already happened.
Why C is wrong: Tempting because it sounds more sensitive than the headline rate, but the average spell of unemployment only lengthens after a downturn is well under way and is classified as a lagging indicator.
Why D is wrong: Industrial production is a genuine cycle measure and is watched closely, but it moves at the same time as output and income rather than ahead of them, so it would confirm the turn rather than warn Marta of it.