CFA Level IEconomicsEasy
A macroeconomic analyst is compiling a country's Index of Leading Economic Indicators. Which of the following is most appropriately classified as a leading indicator?
- ABuilding permits for new private housing units
- BAverage duration of unemployment
- CCommercial and industrial loans outstanding
- DIndex of industrial production
Show answer & explanationAnswer & explanation
Correct answer: A. Building permits for new private housing units
Building permits signal future construction activity and tend to change before the overall economy, making them a leading indicator. Average duration of unemployment and loans outstanding are lagging indicators, while industrial production is a coincident indicator.
Why the other options are wrong
- B. This is a lagging indicator, reflecting past labor market conditions.
- C. Loan levels typically lag changes in the business cycle.
- D. Industrial production moves with the current state of the economy (coincident).
Leading Economic Indicators
Economic variables that tend to change before the overall economy changes direction, used to forecast future business cycle turning points.
- Examples: building permits, stock prices, new orders for capital goods
- Coincident indicators move with the economy (e.g., industrial production)
- Lagging indicators confirm trends after they occur (e.g., unemployment duration)
Memory trick: Leading indicators are the crystal ball; lagging indicators are the rearview mirror.