This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

Volume Title: Business Cycles, Inflation, and Forecasting, 2nd edition

Volume Author/Editor: Geoffrey H. Moore

Volume Publisher: Ballinger

Volume ISBN: 0-884-10285-8

Volume URL: http://www.nber.org/books/moor83-1

Publication Date: 1983

Chapter Title: An Introduction to International Economic Indicators

Chapter Author: Geoffrey H. Moore

Chapter URL: http://www.nber.org/chapters/c0692

Chapter pages in book: (p. 65 - 92)

thetries

atorshemmdi- Chapter 6ly,chtt An Introduction to International

In- Economic IndicatorsIbeenn in--jied,i theLnce,eco-ime.OCU- For many years a system of leading, coincident, and lagging eco-re a- nomic indicators, first developed in the 1930s by the National Bu-from reau of Economic Research, has been widely used in the Unitednuch States to appraise the state of the business cycle. Since 1961 the cur-

rent monthly figures for these indicators have been published by theU.S. Department of Commerce in Business Conditions Digest. Simi-lar systems have been developed by government or private agencies inCanada, Japan, the United Kingdom, and more recently in manyother countries. Because of differences in content or methodology,however, these independent efforts do not provide comparable mate-rials. In 1973 the NBER Bureau began to develop an internationaleconomic indicator system (IEI) that would provide comparabledata, organized and analyzed in a comparable manner, for a numberof industrial countries. The Center for International Business CycleResearch at Rutgers University in New Jersey has continued thiswork since 1979. The research has demonstrated that such a systemcan be helpful in tracking an international recovery or recession, inrevealing factors that are holding back recovery or leading to reces-sion, in anticipating changes in foreign trade flows, and in providingearly warning of new inflationary trends. The Organization for Eco-nomic Cooperation and Development (OECD) and statistical agenciesin Canada, the United Kingdom, West Germany, France, Italy, Japan,and the United States have cooperated with the NBER and with theRutgers Center in compiling and analyzing the current data for this

Reprinted from International Economic Indicators: A Sourcebook, by Geof-frey H. and Melita H. Moore, Greenwood Press, forthcoming.

65

66 Business Cycles

system of indicators. The practical results of this research programare now available for use.

In this chapter the functions of the indicator system are explainedand the evidence summarized concerning its strength and weaknesses,and it is demonstrated how the system can be used to forecast busi-ness cycles, exports and imports, and inflation rates.

FUNCTIONS OF THE IEI SYSTEM

The first NBER study of business cycle indicators, conducted in1937 by Wesley C. Mitchell and Arthur F. Bums, had as its immedi-ate objective the use of indicators to signal a cyclical revival—that is,the ending of a recession, specifically the ending of the severe reces-sion in the United States that began in spring 1937. When the workwas taken up again after World War II, the objective was broadenedto include signals of a cyclical downturn, and NBER. studies com-pleted in 1950, 1960, and 1966 as well as a Commerce Departmentstudy in 1975 focused on both the beginning and the end of reces-sions. An international system designed along similar lines shouldsignal both peaks and troughs in each of the countries covered as wellas in several countries taken together. In short, an important func-tion of the IEI system is to detect a worldwide recession or recov-ery promptly. The importance of this function is underlined by thefact that international recessions—those in which many countriesparticipate more or less simultaneously—have been more serious thanlocalized recessions. One need only point to 1973-1975 and 1980-1982 to find examples of recessions that were both serious andinternational.

A second, and closely related, function of the indicator system isto measure the scope, severity, and unusual features of an interna-tional recession or recovery while it is in progress. For example, dur-ing the 1975-1976 recovery in the United States it became commonpractice, in reports devoted to the economic outlook, to compare thecurrent recovery with previous recovery periods in this country. Sim-ilar comparisons were made during the 1980 recession. News maga-zines, business journals, annual reports of corporations, governmentreports, and newspapers used this device as a method of appraisal.But few of the publications made such comparisons for other coun-tries, despite their relevance from a world point of view or their valuein the diagnosis of specific problems pertaining to other countries.One of the reasons is that the necessary information is not readilyaccessible. An international economic indicator system should en-

abledate.

AThederriand jabouingpleadjinventheyalsotry, ttoiit.Thpateiindicthese

Fowarnition.fore,inteninflatapprsystecludpolicfiscal

LEA(AND

Theleadieconcyclecipatiandceivedsive ITtion,

rAn Introduction to International Economic Indicators 67

grain able comparisons of this type to be made routinely and kept up todate.

uned A third function is to help appraise prospects for foreign trade.'sses, The leading indicators are sensitive measures of the general state ofbusi- demand. Although many other factors affect the volume of exports

and imports, demand is surely fundamental. A trade deficit can comeabout because of sluggish demand for exports from a country's trad-ing partners while its own demand for imports is growing. Since theleading indicators include such demand-related factors as new orders,

j in inventory change, hiring rates, and profitability, one can expect thatiedi- they would relate to the demand not only for domestic goods butat is, also for foreign products. Leading indicators for an importing coun-eces- try, therefore, should tell us something about how much it is likelyyork to import, or how much its trading partners are likely to export toened it. The international indicator system should therefore help us antici-om- pate changes in the flow of trade to the countries for which leadingaent indicators are available as well as changes in the trade balances amongces- these countries.ould Fourth, a system of international indicators can provide earlywell warning signals of an acceleration or deceleration in the rate of infla-•unc- tion. Inflation is in part a demand phenomenon, and, as noted be-coy- fore, many of the indicators are demand oriented. Inflation is also an• the international phenomenon. All countries experience it, and waves oftries inflation often occur at about the same time in many countries. Anthan appropriate set of international indicators should show how the price

system responds to and feeds back upon the rest of the economy, in-and cluding, of course, those variables that are under some degree of

policy control, such as the money supply, the flow of credit, or them is fiscal deficit.prna-dur- LEADS AND LAGS IN RECOVERYmon AND RECESSIONp theim- The international economic indicator system consists of groups ofaga- leading, coincident, and lagging indicators covering a wide variety ofient economic processes that have been found to be important in businessisa!. cycles. The leading indicators are for the most part measures of anti-un- cipations or new commitments. They have a "look-ahead" qualityilue and are highly sensitive to changes in the economic climate as per-les. ceived in the marketplace. The coincident indicators are comprehen-lily sive measures of economic performance: real GNP, industrial produc-en- tion, employment, unemployment, income, and trade. They are the

L —. — I

68 Business Cycles

measures to which everyone looks to determine whether a nation isserieprosperous or depressed. The lagging indicators are more sluggish inCOurtheir reactions to the economic climate, but they serve a useful pur-

pose by smoothing out and confirming changes in trend that are first Sona

reflected in the leading and coincident indicators. Moreover, their a 1indivery sluggishness can be an asset in cyclical analysis, because when

they do begin to move, or when they move rapidly, they may show m Si

that excesses or imbalances in the economy are developing or subsid- strating. Hence the lagging indicators can (and often do) provide the ear- pub]

liest warnings of all, as when rapid increases in costs of production procNoutstrip price increases and threaten profit margins, thus inhibiting I

ast]new commitments to invest, which are among the leading indicators.A conspectus of the U.S. indicators arranged according to the type each

madiof economic process they represent and the cyclical timing they ex-hibit is in Table 6—1. The compilation for other industrial countries rese

interis designed to represent substantially the same processes arranged in a eachsimilar manner. The degree of success in accomplishing this varies to bfrom one country to another, as shown in Table 6-2. fererThe attempt to duplicate the U.S. system abroad does not meanTithat all countries are thought to be alike or that other indicators forcould not be found that would serve equally well or better. Duplicat- dateing the U. S. system is not an ultimate goal but merely a practicable perfinterim target. The U. S. indicator system has the advantage of being dud'familiar to many users, and both its empirical properties and the eco- devihomic logic on which it was based have been thoroughly investigated turnby many scholars over a long period.' This logic seems applicable to. in aimany countries where free enterprise prevails. Orders placed for ma- leadschinery that is made to order are likely to lead machinery production respiin any market-oriented economy and are likely also to lead the pro- dure,duction of the goods the machinery helps to produce. Similarly, in ideniany enterprise economy, changes in the relations between prices and encecosts influence incentives to expand future output and to make capi- to 1.tal investments. In countries where there are markets for common ous i

stock, stock prices can be expected to be especially sensitive to Asuchanges in profit prospects as well as to changes in interest rates, and indehence to anticipate the effects of these changes on output, invest- 6—3.ment, and employment. TIThe selection of the U.S. indicator list as a target also advances the thoseobjective of providing sets of indicators as comparable as possible eachacross countries. Unless some attention is paid to this, comparisons of ccof cyclical movements in different countries are likely to become ponehopelessly confused. To cite one example, the index of leading mdi- selvecators published by the British Central Statistical Office includes a the i

—I- I -.

rAn Introduction to international Economic indicators 69

)fl S series on interest rates treated invertedly—that is, a rise in rates ish Ifl counted as a depressing factor, and vice versa. This is not an unrea-pur- sonable position to take, but in the U. S. classification interest ratesfirst are treated on a positive basis and are included among the lagging;heir indicators (see Table 6—1). It is recognized that at times a rapid riseThen in such indicators can be interpreted as an adverse development. Ahow straightforward comparison of the U.S. and U. K. leading indexes asbsid- published in each country would run afoul of this difference in

procedure.tion Nevertheless, it is obvious that the system should not be held inLting

a straitjacket, and that adaptations to the way business is done inors. each country and to the particular statistical data available should betype made as more experience with the system accumulates and additional

ex- research is conducted. Perhaps two systems will evolve, one in whichtnes international comparability is strictly maintained, and one in whichin a each country's own data and cyclical response mechanisms are usedanes to best advantage—always avoiding, as far as possible, arbitrary dif-ferences in methodology.iean The acid test of the plan to assemble comparable sets of indicators

.tors for each country according to the U.S. system lies in whether suchCa

- data behave in the way U. S. experience has led one to expect. Toab e perfo this test long-run trends were fitted to each indicator, in-eing cluding those for the United States, cyclical turning points in theeco- deviations from trend were identified, a chronology of growth-cycleite turns for each country was set up to represent the peaks and troughse 0 in aggregate economic activity (after allowance for trend), and the

leads and lags of each trend-adjusted indicator were measured withion respect to these growth-cycle turns. The trend-adjustment proce-

dure, although subject to difficulties of its own, was essential to theidentification of cyclical movements in countries that had experi-enced almost continuous rapid growth through the period from 1948to 1973. Computer programs, carefully monitored to rule out dubi-

to ous results, helped to enhance the objectivity of the data processing.and A summary of the findings on cyclical timing based on compositeest- indexes constructed from each group of indicators, is given in Table

6-3.the The leading indexes constructed from indicators corresponding toible those classified as leading on the basis of U.S. data, lead as a rule in

each of the other countries except France. The coincident indexes,me of course, show virtually no lead or lag, because they and their corn-idi. ponents are used to determine the growth-cycle chronologies them-es a selves. The lagging indexes lag. Significantly, because the grouping of

the indicators is based on U.S. experience only and not on experi-

I

Tab

le 6

—i.

Cro

ss-c

lass

ifica

tion

of U

.S. I

ndic

ator

s by

Eco

nom

ic P

roce

ss a

nd C

yclic

al T

imin

g.

Eco

nom

ic P

roce

ss

Cyc

lical

Tim

ing

Lead

ing

Rou

ghly

Coi

ncid

ent

Lagg

ing

Empl

oym

ent a

ndun

empl

oym

ent

Ave

rage

wor

kwee

k, m

anu-

fact

urin

g.N

ew u

nem

ploy

men

t in-

sura

nce

clai

ms,

inve

rted

Non

farm

em

ploy

men

t.U

nem

ploy

men

t, in

verte

dLo

ng-d

urat

ion

unem

ploy

men

t,in

verte

d

Prod

uctio

n, in

com

e,co

nsum

ptio

n, a

ndtra

de•

New

ord

ers,

cons

umer

goo

dsan

d m

ater

ials

a.

Gro

ss n

atio

nal p

rodu

ct a

Indu

stria

l pro

duct

ion

Pers

onal

inco

me

aM

anuf

actu

ring

and

trade

sale

saFi

xed

capi

tal

inve

stm

ent

Form

atio

n of

bus

ines

sen

terp

rises

Con

tract

s and

ord

ers,

plan

tan

d eq

uipm

ent a

Bui

ldin

g pe

rmits

, hou

sing

Inve

stm

ent e

xpen

ditu

res,

plan

t and

equ

ipm

ent a

Inve

ntor

ies a

nd in

ven-

tory

inve

stm

ent

Cha

nge

in b

usin

ess

inve

ntor

ies a

Bus

ines

s inv

ento

ries a

Pric

es, c

osts

, and

prof

itsIn

dust

rial m

ater

ials

pric

ein

dex

Stoc

k pr

ice

inde

xPr

ofits

aR

atio

, pric

e to

uni

t lab

orco

st, n

onfa

rm

Cha

nge

in o

utpu

t per

man

hour

,m

anuf

actu

ring,

inve

rted

Mon

ey a

nd c

redi

tC

hang

e, c

onsu

mer

inst

allm

ent d

ebta

Com

mer

cial

and

indu

stria

llo

ans o

utst

andi

nga

Ban

k in

tere

st ra

tes,

busi

ness

loan

s

-

C)

r)

0

Ban

k in

tere

st ra

tes,

busi

ness

loan

s

1

Not

es to

Tab

le 6

-1a

a In

cons

tant

pric

es.

Sour

ces:

The

list

and

cla

ssifi

catio

n is

subs

tant

ially

the

sam

e as

that

pre

pare

d in

196

6 an

d pu

blis

hed

in G

eoff

rey

H. M

oore

and

Juliu

s Shi

skin

, Ind

icat

ors o

f Bus

ines

s Exp

ansi

ons a

nd C

ontra

ctio

ns (N

ew Y

ork:

NB

ER, 1

967)

. The

chi

ef m

odifi

catio

n is

that

thos

e se

ries m

arke

d w

ith a

are

conv

erte

d to

con

stan

t pric

es. T

he ti

min

g cl

assi

ficat

ion

for e

ach

serie

s is t

he sa

me

as sh

own

in B

usi-

ness

Con

ditio

ns D

igie

st fo

r all

turn

s (se

e Ta

ble

1, c

olum

ni, i

n an

y re

cent

issu

e), e

xcep

t as f

ollo

ws:

Une

mpl

oym

ent i

s unc

lass

ified

(U) a

t all

turn

s in

BC

D b

ecau

se it

lead

s at p

eaks

and

lags

at t

roug

hs, b

ut h

ere

it is

cla

ssifi

ed ro

ughl

y co

inci

dent

, as i

n th

e19

66lis

t. Fo

ur se

ries t

hat h

ere

are

in c

onst

ant p

rices

are

show

n in

BC

D o

nly

in c

urre

nt p

rices

: cha

nge

in c

onsu

mer

inst

allm

ent d

ebt,

inve

stm

ent e

xpen

ditu

res f

or p

lant

and

equ

ipm

ent,

com

mer

cial

and

indu

stria

l loa

ns o

utst

andi

ng, a

nd c

hang

e in

out

put p

er m

an-

hour

, man

ufac

turin

g, in

verte

d, w

hich

is th

e co

nsta

nt p

rice

equi

vale

nt o

f lab

or c

ost p

er u

nit o

f out

put.

The

cons

tant

pric

e se

ries

are

assi

gned

the

sam

e cl

assi

ficat

ion

as th

e cu

rren

t pric

e se

ries.

0 0 c-s.

Lead

ing

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

2.0

New

une

mpl

oym

ent c

laim

s a3.

0 N

ew o

rder

s, co

nsum

er g

oods

b4.

0 Fo

rmat

ion

of b

usin

ess e

nter

pris

es5.

0 C

ontra

cts a

nd o

rder

s, pl

ant

and

equi

pmen

tb6.

0 B

uild

ing

perm

its, h

ousi

ng7.

0 C

hang

e in

bus

ines

s inv

ento

riesb

8.0

Indu

stria

l mat

eria

ls p

rices

9.0

Stoc

k pr

ice

inde

x10

.0 P

rofit

sb11

.0 R

atio

, pric

e to

labo

r cos

t12

.0 C

hang

e in

con

sum

er d

ebtb

Coi

ncid

ent

13.0

Non

farm

em

ploy

men

t14

.0 U

nem

ploy

men

t rat

ea15

.0 G

ross

nat

iona

l pro

duct

b16

.0 In

dust

rial p

rodu

ctio

n17

.0 P

erso

nal i

ncom

eb18

.0 M

anuf

actu

ring

and

trade

sale

sLa

ggi r

ig19

.0 L

ong-

dura

tion

unen

iplo

ymen

ta20

.0 P

lant

and

equ

ipm

ent i

nves

tmen

tb21

.0 B

usin

ess i

nven

torie

s22

.0 P

rodu

ctiv

ity c

hang

e, n

onfa

rma

23.0

Bus

ines

s loa

ns o

utst

andi

ngh

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

2.0

New

une

mpl

oym

ent c

laim

s a3.

1 N

ew o

rder

s, du

rabl

e go

odsb

na.

New

ord

ers,

equi

pmen

tbN

onre

side

ntia

l bui

ldin

g pe

rmits

bR

esid

entia

l bui

ldin

g pe

rmits

Cha

nge

in b

usin

ess i

nven

torie

sbIn

dust

rial m

ater

ials

pric

esSt

ock

pric

e in

dex

Prof

its'>

Rat

io, p

rice

to la

bor c

ost

Cha

nge

in c

onsu

mer

deb

tb

Nor

ifarm

em

ploy

men

tU

nem

ploy

men

t rat

e a

Gro

ss n

atio

nal e

xpen

ditu

resb

Indu

stria

l pro

duct

ion

Pers

onal

inco

me>

Ret

ail t

rade

b

Long

-dur

atio

n un

empl

oym

enta

Plan

t and

equ

ipm

ent i

nves

tmen

tbB

usin

ess i

nven

torie

s1Pr

oduc

tivity

cha

nge,

man

u fa

ctur

inga

Bus

ines

s loa

ns o

utst

andi

ng'

Inte

rest

rate

s, bu

sine

ss lo

ans

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

2.0

New

une

mpl

oym

ent c

laim

sa3.

1 C

hang

e in

unf

illed

ord

ers C

n.a.

n.a.

6.0

Res

iden

tial b

uild

ing

perm

its7.

0 C

hang

e in

stoc

ksb

8.0

Raw

mat

eria

ls p

rices

9.0

Stoc

k pr

ice

inde

xna

.11

.0 R

atio

, pric

e to

labo

r cos

tn.

a.

Non

farm

em

ploy

men

tR

egis

tere

d un

empl

oyed

, num

bera

Gro

ss d

omes

tic p

rodu

ctio

nbIn

dust

rial p

rodu

ctio

nna

.18

.1 R

etai

l sal

esb

Long

-dur

atio

n un

empl

oym

ent>

'Pl

ant a

nd e

quip

men

t inv

estm

ent1

Bus

ines

s inv

ento

riest

Prod

uctiv

ity c

hang

e, n

onfa

rm>'

Bus

ines

s loa

ns o

utst

andi

ngb

Inte

rest

rate

s, bu

sine

ss lo

ans

Uni

ted

Stat

esU

nite

d K

ingd

omW

est G

erm

any

-..

Tab

le 6

—2.

A C

lass

ifica

tion

and

List

of I

nter

natio

nal E

cono

mic

Indi

cato

rs.

Uni

ted

Stat

esC

anad

aFr

ance

Ca C)

Ca

C,)

5.1

5.2

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.1

19.0

20.0

21.0

22.1

23.0

24.0

13.0

14.1

15.0

16.0

19.0

20.0

21.0

22.0

23.0

24.0

T5Tf

ls-io

smw

-'o.rt

ninT

ru1-

ng—

-—-—

24.0

inte

rest

rate

s, bu

sine

ss lo

ans

1:u

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

- --

----

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

Uni

ted

Stat

esU

nite

d K

ingd

omW

est G

erm

any

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

14.0

15.0

16.0

17.0

18.0

Con

tract

s and

ord

ers,

plan

tan

d eq

uipm

entb

Bui

ldin

g pe

rmits

, hou

sing

Cha

nge

in b

usin

ess i

nven

torie

s'In

dust

rial m

ater

ials

pric

esSt

ock

pric

e in

dex

Prof

itsb

Rat

io, p

rice

to la

bor c

ost

Cha

nge

in c

onsu

mer

deb

tb

Une

mpl

oym

ent r

ate

aG

ross

nat

iona

l pro

duct

"In

dust

rial p

rodu

ctio

nPe

rson

al in

com

e1M

anuf

actu

ring

and

trade

sale

s

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

n. a

.n.

a.

New

com

pani

es re

gist

ered

Bus

ines

s fai

lure

sN

ew o

rder

s, en

gine

erin

g in

dust

ryb

New

ord

ers,

cons

truct

ionb

Hou

sing

star

tsC

hang

e in

stoc

ks b

Bas

icm

ater

ials

pric

esSt

ock

pric

e in

dex

Prof

its b

Rat

io,

pric

e to

labo

r cos

tIn

crea

se in

hire

pur

chas

e de

btb

13.0

Em

ploy

men

t, in

dust

ry

Reg

iste

red

unem

ploy

ed, n

umbe

raG

ross

dom

estic

pro

duct

bIn

dust

rial p

rodu

ctio

nPe

rson

al in

com

eR

etai

l sal

esb

Long

-dur

atio

n un

empl

oym

enta

Plan

t and

equ

ipm

ent e

xpen

ditu

re b

Bus

ines

sin

vent

orie

sbPr

oduc

tivity

cha

nge,

indu

stry

aIn

dust

rial a

nd a

gric

ultu

ral l

oans

outs

tand

ing'

Inte

rest

rate

s, bu

sine

ss lo

ans

(Tab

le 6

—2.

con

tinue

d ou

erle

af)

•1.

1Sh

ort-h

our w

orke

rs5

2.0

Une

mpl

oym

ent a

pplic

ants

an.

a.4.

1 In

solv

ent e

nter

priS

esa

5.1

New

ord

ers,

inve

stm

ent g

oods

b

Res

iden

tial c

onst

ruct

ion

orde

rsb

Inve

ntor

y ch

ange

bB

asic

mat

eria

l pric

esd

Stoc

k pr

ice

inde

xIn

com

e fr

om e

nter

pris

ebR

atio

, pric

e to

labo

r cos

tC

hang

e in

con

sum

er d

ebtb

13.1

Em

ploy

men

t, m

inin

g an

dm

anuf

actu

ring

14.0

Reg

iste

red

unem

ploy

men

t rat

ea15

.0 G

ross

nat

iona

l pro

duct

b16

.0 In

dust

rial p

rodu

ctio

n17

.0 D

ispo

sabl

e in

com

e'18

.1 M

anuf

actu

ring

sale

sb18

.2 R

etai

l tra

deb

n.a.

20.0

Pla

nt a

nd e

quip

men

t exp

endi

ture

b21

.0 B

usin

ess i

nven

torie

s22

.1 P

rodu

ctiv

ity c

hang

e, in

dust

ry a

23.1

Ban

k lo

ans o

utst

andi

ngb

24.1

Inte

rest

rate

s, la

rge

loan

s

'.4 0' c..

Lead

ing

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

2.0

New

une

mpl

oym

ent c

laim

s a3.

0 N

ew o

rder

s, co

nsum

er g

oods

b4.

0 Fo

rmat

ion

of b

usin

ess e

nter

pris

es4.

14.

25.

15.

26.

07.

08.

0 9.0

10.0

11.0

12.0

Coi

ncid

ent

13.0

Non

farm

em

ploy

men

t

6.1

7.0

8.0 9.0

10.1

11.0

12.0

"4 I.

14.0

15.0

16.0

17.0

18.1

19.0

20.0

21.0

22.0

23.1

24.0

Lagg

ing

19.0

Lon

g-du

ratio

n un

empl

oym

enta

20.0

Pla

nt a

nd e

quip

men

t inv

estm

ent'

21.0

Bus

ines

s inv

ento

riesb

22.0

Pro

duct

ivity

cha

nge,

non

farm

a23

.0 B

usin

ess l

oans

out

stan

ding

b

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

Tab

le 6

-2. c

ontin

ued

Uni

ted

Stat

esIta

lyJa

pan

Lead

ing

1.0

Ave

rage

wor

kwee

k, m

anuf

actu

ring

1.1

Mon

thly

hou

rs, i

ndus

try1.

1O

verti

me

wor

ked,

man

ufac

turin

g2.

0 N

ew u

nem

ploy

men

t cla

imsa

3.0

New

ord

ers,

cons

umer

goo

dsb

3.1

n.a. Cha

nge

in u

nfill

ed o

rder

s'n.

a.n.

a.4.

0 Fo

rmat

ion

of b

usin

ess e

nter

pris

es4.

1D

ecla

red

bank

rupt

cies

a4.

1B

usin

ess f

ailu

resa

5.0

Con

tract

s and

ord

ers,

plan

tan

d eq

uipm

ent'

n.a.

5.0

New

ord

ers,

mac

hine

ry a

ndco

nstru

ctio

nb6.

0 B

uild

ing

perm

its, h

ousi

ng7.

0 C

hang

e in

bus

ines

s inv

ento

riesb

6.0

Res

iden

tial b

uild

ing

perm

itsn.

a.6.

17.

0D

wel

ling

units

star

ted

Cha

nge

in in

vent

orie

sb8.

0 In

dust

rial m

ater

ials

pric

esn.

a.8.

0R

aw m

ater

ials

pric

es9.

0 St

ock

pric

e in

dex

9.0

Stoc

k pr

ice

inde

x9.

0St

ock

pric

e in

dex

10.0

Pro

fitsb

n.a.

10.0

Prof

itsb

11.0

Rat

io, p

rice

to la

bor c

ost

12.0

Cha

nge

in c

onsu

mer

deb

tb11

.0R

atio

, pric

e to

labo

r cos

tn.

a.11

.012

.1R

atio

, pric

e to

labo

r cos

tC

hang

e in

con

sum

er a

ndho

usin

g de

bth

Coi

ncid

ent

13.0

Nor

ifarm

em

ploy

men

t13

.0N

onfa

rm e

mpl

oym

ent

13.0

Non

farm

em

ploy

men

t,re

gula

r wor

kers

14.0

Une

mpl

oym

ent r

atea

15.0

Gro

ss n

atio

nal p

rodu

ct"

14.0

15.0

Une

mpl

oym

ent r

atea

Gro

ss d

omes

tic p

rodu

ct'

14.0

15.0

Une

mpl

oym

ent r

atea

Gro

ss n

atio

nal e

xpen

ditu

res

16.0

Indu

stria

l pro

duct

ion

17.0

Per

sona

l inc

ome'

18.0

Man

ufac

turin

g an

d tra

de sa

lesb

16.0

18.1

Indu

stria

l pro

duct

ion

n.a.

Ret

ail s

ales

b

16.0

17.1

18.1

Indu

stria

l pro

duct

ion

Wag

e an

d sa

lary

inco

me

Ret

ail s

ales

'La

ggin

g19

.0 L

ong-

dura

tion

unem

ploy

men

t't20

.0 P

lant

and

equ

ipm

ent i

nves

tmen

t'21

,0 B

usin

ess i

nven

torie

sb20

.121

.0

n.a

Plan

t and

equ

ipm

ent e

xpen

ditu

resb

Bus

ines

s inv

ento

riesb

20.0

21.0

n.a.

Plan

t and

equ

ipm

ent e

xpen

ditu

reb

Bus

ines

s inv

ento

riesb

22.0

Pro

duct

ivity

cha

nge,

non

farm

't23

.0 B

usin

ess l

oans

out

stan

ding

bna

.n.

a.22

.123

.1Pr

oduc

tivity

cha

nge,

indu

stry

aTo

tal l

oans

out

stan

ding

b24

,0 In

tere

st ra

tes,

busi

ness

loan

s24

.0In

tere

st ra

tes,

busi

ness

loan

s24

.1In

tere

st ra

tes,

busi

ness

loan

s

C.,

j

-.,

-_o_

_,._

..___

,.---

.— .—

. ..-

3—

23.0

Bus

ines

s lo

ans

outs

tand

ing

na.

231

Tota

l loa

ns o

utst

andj

ngb

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

24.0

Inte

rest

rate

s, bu

sine

ss lo

ans

24:1

Inte

rest

rate

s, bu

sine

ss lo

ans

Not

esto

Tab

le 6

-2a C

,

a T

reat

edin

verte

dly

in th

e co

mpo

site

inde

xes.

bIn

cons

tant

pric

es.

CC

hang

ein

net

bal

ance

of s

urve

y re

spon

ses.

0

d N

otin

clud

ed in

lead

ing

inde

x fo

r Wes

t Ger

man

y.N

ole:

Ser

ies n

umbe

rs a

re b

ased

on

the

U.S

. lis

t.Th

e di

gits

afte

r the

dec

imal

indi

cate

whe

ther

the

serie

s is s

ubst

antia

lly th

e sa

me

asth

e U

.S. s

erie

s (0)

, or o

nly

roug

hly

equi

vale

nt(1

or 2

).So

urce

: Cen

ter f

or In

tern

atio

nal B

usin

ess

Cyc

le R

esea

rch,

Rut

gers

Uni

vers

ity.

C, 0 0

0

rL.

—E

e-•-

,. —

Tab

le 6

-3.

Cyc

lical

Tim

ing

of E

cono

mic

Indi

cato

rs d

urin

g G

row

th C

ycle

s, S

even

Cou

ntrie

s.

Sou

rce:

Cen

ter

for I

nter

natio

nal B

usin

ess C

ycle

Res

earc

h, R

utge

rs U

nive

rsity

.

A

1!M

edian Lead

(—)

orLa

g(+

), in

Mon

ths

Uni

ted

Stat

es' C

anad

aUnited

Kingdom

West

Germany

Fran

ceIta

lyJa

pan

A v

erag

es:

Six

1948-

1948-

1952-

1950-

1951-

1956-

1953-

Counlries

Seven

198!

1981

1981

1981

1981

1977

1975

Except U.S.

Countries

At g

row

th-c

ycle

pea

ksLa

ggin

g in

dex,

inve

rted

-15

—13

-24

—12

—12

—14

—14

—15

—15

Lead

ing

inde

x—

2—

2—

10—

70

—9

—4

—5

—5

Coi

ncid

ent i

ndex

+10

00

+20

—1

00

Lagg

ing

inde

x+5

+5+7

+2+2

+2+8

+5+5

At g

row

th-c

ycle

trou

ghs

Lagg

ing

inde

x, in

verte

d-1

1—

16-1

9—

18—

16—

7—

14-1

5—

14Le

adin

g in

dex

-2-4

-9—

20

—6

—5

—4

—4

Coi

ncid

ent i

ndex

00

00

0+3

00

0La

ggin

g in

dex

+6+4

+8+4

+5+1

0+8

+6+6

An Introduction to International Economic Indicators 77

ence in the country itself, the sequence of turns among the leading,coincident, and lagging groups in each country corresponds roughlyto the sequence in the United States. The detailed results show thatthis sequence has been repeated at virtually every turn in each coun-try. Moreover, this consistency includes the tendency for the turnsin the lagging indexes to precede opposite turns in the leading in-dexes, corresponding to the economic logic noted previously (com-pare the top line with the second line in each panel of the table).The sequences do not appear to differ systematically from one coun-try to another: hence it is appropriate to average them (see the lasttwo columns of the table). The average sequence is set forth sche-matically in Figure 6-1. Since the growth-cycle chronologies and therecorded leads and lags are based on trend-adjusted data, the risingand falling phases are roughly symmetrical, as are the intervals intowhich they are subdivided by the turns in the indexes.

Nevertheless, it is true that there are wide variations in the lengthsof lead or lag from one cycle to another or from one indicator toanother. The system is neither simple nor mechanical. But the his-torical record is available to help guide current interpretations, andit appears to support the basic hypothesis underlying the scheme,namely, that the U. S. indicator system is broadly applicable overseas.

The composite indexes referred to in Table 6-3 have been com-puted using a method employed for some years by the U. S. Depart-

Figure 6—1. Average Sequence of Cyclical Turns in Three Composite Indexesduring Growth Cycles, Seven Countries.

PEAK,LEAOING-1 PEAK, rPEAK,LAGGING

r TROUGH,COINCIDENT \ COINCIDENT /I I TROUGH COINCIDENTI TROUGH, !

[LAGGING/

TROUGH, LEADING

-6 MOS. 10 MOS. 5 1IIOS. 5 MOS. 14 MOS. 4 NOS.

RECOVERY AND EXPANSION SLOWDOWN AND CONTRACTION

(

21 MOS. 23

GROWTH CYCLE-'44 MOS.

Source: Table 6-3.

4

78 Business Cycles

ment of Commerce. The indexes are constructed so that their trend Figuri

rate of growth during 1966-1976 is equal to that of real GNP for the Coun

country concerned during the same period. The procedure correctsfor the rather haphazard long-run trends that are likely to resultfrom combinations of indicators that,, despite efforts to obtain corn-parabiity, are not precisely the same in the several countries. In addi-tion to the indexes with trend equal to the trend in GNP, indexesare available with the long-run trend eliminated. These depict thegrowth cycles discussed previously. The trend rates of growth in theindividual indicators are of interest in themselves for the purposes ofanalyzing each country's long-run rate of growth.2 Finally, short-run rates of growth in the indexes have been compiled, based onchanges over successive intervals of six months or twelve months.These rates also depict the growth cycles, but they do not dependupon any trend-fitting procedure and hence avoid the uncertaintythat is inevitably attached to bringing such trends up to date.

Although the procedure ensures that the long-run trend in the in-dexes will be approximately the same as the trend in real GNP, thefluctuations in the indexes are larger than those in GNP, partly be-cause most of the components are more sensitive than GNP, partlybecause most of them are monthly rather than quarterly. Anotherreason is that the average month-to-month change (without regardto sign) in each country's industrial production index is used as astandard by which to adjust the month-to-month change in theindex, and industrial production usually undergoes wider swings than SIX I

GNP. The indexes thus provide measures of economic performancebased not on a single indicator but on a group of significant indica-tors that are relatively homogeneous with respect to cyclical timing.As a consequence of both the cyclical homogeneity and the varietyof economic data included, the indexes are relatively free of themonth-to-month irregularities that beset most economic time series.

Figure 6-2 compares the leading and coincident indexes for theUnited States and for six other countries combined (Canada, UnitedKingdom, West Germany, France, Italy, and Japan) during 1972-1982. In the combined index each country's index is weighted by thecountry's GNP in 1970 (expressed in U.S. dollars). Figure 6-3 showsthe growth rates for the same indexes.3 Both charts demonstrate thecapacity of the leading indexes to keep a few months ahead of thebroad measures of economic performance contained in the coinci-dent indexes.

Another illustration of the kind of sequence that can be expected * Spe

by monitoring the leading and the coincident indicators, covering a aCan

longer historical period, may be found in Figure 6-4. Here the Sow

An Introduction to International Economic Indicators 79

endthe

ectssuitom-ddi-'xesthethes ofort-

onths.endnty

in.thebe.

rtly,heriardas athe

hanncelica-ing.ietythe

ries.theted72-i theowsthethenci.

ktedfig ath

Figure 6-2. Leading and Coincident Indexes, United States and Six OtherCountries, 1972-1982.

Specific cycle peak or trough.a Canada, United Kingdom, West Germany, France, Italy, Japan.Source: Center for International Business Cycle Research, Rutgers University.

1970: 100

72 73 74 75 76 77 78 79 80 81 82

80 Business CyclesT

Change).

Figure 6-3. Growth Rates in Leading and Coincident Indexes, United Statesand Six Other Countries, 1972-1982 (Twelve-Month Smoothed Percentage

PERCENT

- z -

LU

C.)oE w

a,

-5

-_c t.s

-o- 5,;(D

I:Note: Arrows indicate rate of change, 1966-1976, in the indexes and in real GNP. g,3Canada, United Kingdom, West Germany, France, Italy, Japan.Source: Center for International Business Cycle Research, Rutgers University.

72 73 74 75 76 77 8078 79 81 82

r'1 :5,

C)

m z -4

C) 0 0 -4 CD a) -4 0• 0) 0 0 0. cc a) -4 0

(aI

ccC

-fl

(CC

CD

Fig

ure

6—4.

Gro

wth

Rat

es in

Lea

ding

Inde

x an

d in

Indu

stria

l Pro

duct

ion,

Wes

tern

Eur

ope,

106

-)98

2 t,T

wel

ve-m

onth

smoo

thed

per

cent

age

chan

ge).

j

a

56 5

7 58

59

60 6

162

63

64 6

5 66

67

68 6

9 70

71

72 7

3 74

75

76 7

7 78

79

80 8

182

aU

nite

d K

ingd

om, l

Nes

t Ger

man

y. F

ranc

e, It

aly.

binc

lude

s in

add

ition

to th

e ab

ove

four

cou

ntrie

s: A

ustr

ia, B

elgi

um, F

inla

nd, G

reec

e, Ir

elan

d, L

uxem

bour

g, T

he N

ethe

rland

s, N

orw

ay, P

ortu

gal.

Spa

in, S

wed

en, a

nd S

witz

erla

nd.

Sou

rces

: Lea

ding

Inde

x, C

ente

r fo

r In

tern

atio

nal B

usin

ess

Cyc

le R

esea

rch;

Indu

stria

l Pro

duct

ion

Inde

x, O

rgan

izat

ion

for

Eco

nom

ic C

oope

ra-

tion

and

Dev

elop

men

t.

Perio

dC

over

ed

Num

ber o

f

Tota

l

Ave

rage

Lea

d (—

)or

Lag

(+),

in M

onth

sLe

ads

Coi

ncid

ence

Lags

United States

1958—1979

10

20

12

-3

Canada

1958—1979

63

211

—1

United Kingdom

1957—1979

53

311

—4

West Germany

1959-1979

8—

210

-4

France

1959—1979

71

513

-3

Italy

1958-1979

91

111

-4

Japan

1958—1979

10

21

13

—2

Tota

l, se

ven

coun

tries

55

12

14

81

—3

Com

posi

te in

dexe

s:W

este

rñEu

rope

a19

56-1

979

91

111

—4

Six

coun

tries

bex

clud

ing

Uni

ted

Stat

es19

72-1

979

40

04

—2

Sour

ce: C

ente

r for

Inte

rnat

iona

l Bus

ines

s Cyc

le R

esea

rch,

Rut

gers

Uni

vers

ity.

A

m0-

f,<

0_c

çcn

o'C

D5

CD

5C

)C

)0.

'1C

DnC

I00.

I

ti'C

D .

CD

P<

0

0 5

C)

C)

P '"

—. C

'•i'

.U

,.ç

,p

-j

Tab

le 6

—4.

Lead

ing

Inde

xes

and

Indu

stria

l Pro

duct

ion,

Sev

en C

ount

ries

(Lea

ds a

nd L

ags

at T

urni

ng P

oint

sin

Rat

es o

f Cha

nge)

.to C

.., (a Pc C,

Not

e: T

he ra

tes o

f cha

nge

in b

oth

the

lead

ing

and

indu

stria

l pro

duct

ion

inde

xes a

re p

erce

ntag

e ch

ange

s ove

r tw

elve

mon

ths,

smoo

thed

, as e

xpla

ined

in th

e te

xt.

aT

hele

adin

g in

dex,

com

pile

d by

the

Cen

ter,

incl

udes

the

Uni

ted

Kin

gdom

, Wes

t Ger

man

y, F

ranc

e an

d Ita

ly, w

eigh

ted

byth

eir r

eal G

NP,

in U

.s. d

olla

rs, i

n 19

70. T

he in

dust

rial p

rodu

ctio

n in

dex,

com

pile

d by

OEC

D, i

nclu

des t

he a

bove

four

coun

tries

plu

s Aus

tria,

Bel

gium

, Lux

embo

urg,

Fin

land

, Gre

ece,

Irel

and,

The

Net

herla

nds,

Nor

way

, Por

tuga

l, Sp

ain,

Swed

en, a

nd S

witz

erla

nd, w

eigh

ted

by g

ross

dom

estic

pro

duct

orig

inat

ing

in in

dust

ry.

bC

anad

a,U

nite

d K

ingd

om, W

est G

erm

any,

Fra

nce,

Ital

y, Ja

pan.

In th

e le

adin

g in

dex,

com

pile

d by

the

Cen

ter,

the

coun

-tri

es a

re w

eigh

ted

by th

eir r

eal G

NP,

in U

.S. d

olla

rs, i

n 19

70. I

n th

e in

dust

rial p

rodu

ctio

n in

dex,

com

pile

d by

the

U.S

.D

epar

tmen

t of C

omm

erce

, the

cou

ntrie

s are

wei

ghte

d by

gro

ss d

omes

tic p

rodu

ct o

rigin

atin

g in

indu

stry

, in

U.S

. dol

lars

,in

197

5.

An Introduction to International Economic Indicators 83

growth rates in the composite leading index for four European coun-tries are compared with the industrial production index for OECDEurope. Industrial production is one of the most widely used eco-nomic indicators around the world, and it is one of the componentsof our coincident indexes. Many countries do not have quarterly esti-mates of gross national product but do have monthly figures on in-dustrial production. Covering manufacturing and mining and oftenincluding utilities and construction activity, the index pertains to asector of the economy that is highly sensitive to business cycles.

For all these reasons it is important to watch the industrial pro-duction index, and to contemplate where it is going next. Here iswhere the leading indexes can be helpful. The comparison in Figure6-4 reveals that the swings in the growth of industrial productionin Europe correspond to those in our leading index with considerablefidelity. Detailed study shows this to be true also of the data for eachcountry. Furthermore, the turns in the leading index growth ratesusually precede those in industrial production and are easier to recog-nize because the leading indexes are smoother and less influenced byerratic movements. As Table 6-4 shows, leads outnumber lags by

2 nearly four to one. The average lead time for all seven countries coy-ered by the table is three months.

The economic basis for this relationship is that the components ofthe leading index represent actions of an anticipatory nature that areespecially sensitive to changes in cost and profit prospects and thestate of demand. New orders for equipment, contracts placed forconstruction work, and housing starts are obvious examples. Thelength of the average workweek is one of the first adjustments madewhen manufacturers detect a shift in demand and reduce or increaseovertime work or the number of part-time employees. By combininga dozen or so of such measures into a single index, the idiosyncrasiesof any single one of them are muted, and the result is a leading indexpossessing the properties described. These properties do not make itan infallible instrument for appraising the outlook in any country.But when a businessman judges the future of his company, he doesnot regard the current state of his orderbooks as an infallible guideeither. That does not stop him from wanting to know what statethey are in. It is the same with the leading indexes. They reflectactions that are likely to affect production a few months hence, andconsequently are useful guides to the state of the market.

RECESSION-RECOVERY PATTERNS

Once an historical chronology of business cycles or growth cycles hasbeen established and a collection of indicators assembled, it becomes

I

84 Business Cycles

possible to compare the current behavior of the indicators with theirpatterns of change during the corresponding stages of previous cy- Figuredes. Although no two business cycles are exactly alike, there arefamily resemblances, and they can be employed systematically toevaluate the current situation and glimpse what lies ahead.

Methods of making such comparisons have been employed formany years in the United States. The Commerce Department's Busi-ness Conditions Digest regularly carries charts of this type, and theRutgers Center for International Business Cycle Research issues pe-riodic reports utilizing the technique.4 The comparisons help one toanticipate what is typical business cycle performance and to observewhether current performance is in line with it or not. Although everybusiness cycle has its own surprises, partly because of policy actionstaken, many developments are not surprising, having occurred manytimes before. Hence a look at what has happened during the laterstages of past business cycles is also a look ahead.

An example of how this works in practice is provided by Figure6-5. The behavior of the U.S. leading and coincident indexes duringthe recession that started from the business cycle peak of July 1981is compared with their average pattern during the seven precedingrecessions. These seven can be divided into two groups: four reces-sions that were relatively sharp (1949, 1954, 1958, 1975) and threethat were mild (1961, 1969, 1980). Such a chart gives one a quick.grasp of how mild or severe a current recession is, how it comparesin duration, whether the usual signs of recovery are developing, andso on.

IMPLICATIONS FOR FOREIGN TRADE

The effect upon the economy of one country of a slowdown in eco-nomic growth in other countries is likely to be most visible in thatcountry's exports. The volume of exports depends upon the trend ofeconomic activity in the country to which the exports go. Ordinarilythis is measured by gross national product or industrial production,both of which are among the coincident indicators. Since the leadingindicators, as we have seen, usually anticipate the movement of thecoincident by several months, the leading indexes for the tradingpartners may also anticipate the movements in exports to them. Anumber of tests of this hypothesis have been made, using the leadingindexes to forecast the rate of change in the volume of trade to andfrom particular countries or groups of countries, and for trade as awhole as well as for various commodity groupings. The results of this resentsresearch show that a substantial proportion of the year-to-year indexe

eco-thatd ofri1y1on,dingthe

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An Introduction to International Economic Indicators 85

Figure 6-5. Patterns of Current and Previous Recessions.heircy-

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U.S. LEADING INDEX (IEI) 1970=100

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MONTHS FROM BUSINESS CYCLE PEAKJAN. 81 JUL. SI JAN. 82 JUL.82 JAN.83

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128

126

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Note: The vertical line at zero represents business cycle peak dates. The current and pre-vious business cycles are aligned so that their peaks fall on this line. The horizontal line rep-resents the level of the data at business cycle peaks. The historical data are converted toindexes with their business-cycle peak levels equal to the current business cycle peak level.

86 Business Cycles

changes in trade flows can usually be accounted for in this manner.Figure 6—6 displays the results of one such test, where the percen- Figuitage rates of growth in U.S. exports to all countries, after allowancefor changes in prices, are compared with the prior changes in anexport-weighted leading index for the six countries outside theUnited States. Despite the fact that exports are affected by manyother factors not explicitly taken account of in this simple model,the method tracks the major swings fairly well.

The same method can be employed to forecast the exports of anycountry, developed or developing, that trades with the industrialcountries for which we have leading indexes. We have already ob-tained similar results for the exports of the United Kingdom, WestGermany, Japan, and for a major group of developing countries.Naturally this method by itself has serious limitations, since it ig-nores other factors that influence the quantities of goods exported.Changes in exchange. rates, tariffs and other barriers or incentives totrade, supply conditions, and pricing policies are taken into accountonly insofar as they affect the leading indicators for the importingcountries. Yet, in view of the importance of trade flows and tradebalances in the economic relations among nations, even a modestcontribution to our economic intelligence in appraising trade pros-pects is worthwhile.

IMPLICATIONS FOR INFLATION

Growth cycles are closely associated with the rate of inflation. In-deed, as far as U.S. experience is concerned, declines in the rate ofinflation have been associated with virtually every slowdown or con-traction in real economic growth and have not occurred at othertimes. Both parts of this proposition are important. Declines in therate of inflation have not been as rare as is commonly believed, butthey have occurred only at times of slower economic growth, neverat times of rapid growth. The proposition appears to be true in othercountries as well as in the United States.

The international indicator system is helpful in examining the evi-dence, and so is the concept of the growth cycle described earlier.This distinguishes periods of rapid growth from periods of slowgrowth by reference to a long-run trend. Trend-adjusted data rise aslong as the short-run rate of growth exceeds the long-run rate. Theydecline as long as the short-run rate is less than the long-run rate. NotThe peaks and troughs in trend-adjusted data, therefore, delineate Note:periods of rapid and slow growth relative to the trend rate. ber 1

expo

Billrons of 1972 Dollars

An Introduction to International Economic Indicators 87

Figure 6—6. U.S. Exports and an Export-Oriented Leading Index.

1970 100

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r

88 Business Cycles

For the United States, a chronology of growth cycles based ontrend-adjusted data for the physical volume of aggregate economicactivity is used in Figure 6-7 as a backdrop against which to exam-me the movements in the rate of change in two price indexes. Theindex of industrial materials prices—that is, prices of metals, textiles,rubber, and the like—shows an especially close relation to the growthcycle. Downswings in the rate of change in these prices occurred inevery period of slow growth or recession, and upswings occurred inevery period of rapid growth. Often, as in 1956 and 1959, the down-swings began before the onset of the slow-growth periods. This priceindex is one of the leading indicators in Table 6—1; here it leads notonly the growth cycle but also the rate of change in the consumerprice index (CPI), the bottom line in Figure 6-7. The CPI, whichof course includes the prices of services as well as commodities, re-sponds to the growth cycle as well, but often with a lag of a year ormore. The lags have been so long, especially in recent years, thatsometimes the rate of inflation in the CPI has risen almost through-out the period of slow growth or recession, giving the erroneous im-pression that slow growth had no influence on inflation.

Watching both price indexes together, and bearing in mind theirdifferences in sensitivity and tendency to lag, enables one to see thatgrowth cycles have pervasive influences upon the price structure. Thechange one sees in the consumer price index (as, for example, thedecline in its rate of increase from autumn 1974 to spring 1976) isa lagged response to or reflection of similar developments in corn-modity markets that react far more promptly to changes in demandpressures or supply conditions.

Corresponding data and growth cycle chronologies for the sixother countries covered in the international indicator system suggestthat similar relations are to be found in these countries. Conditionsthat produce rates of economic growth greatly in excess of long-runtrend are conducive to an acceleration of inflation, while conditionsthat make for slow growth or recession are conducive to a reducedrate of inflation or even to deflation. When ordering is brisk andorder backlogs accumulate, sellers have opportunities and incentivesto raise prices, and buyers are less averse to paying them. Costs ofproduction tend to creep up, labor turnover increases, control overefficiency and waste tends to decline. New commitments for invest- C,,

ment are made in an optimistic environment, building up demand forlimited supplies of skilled labor and construction equipment. Creditto build inventories is more readily available and is in greater de-mand, even if higher interest rates must be paid for it, thereby raisingcosts. Labor unions see better opportunities to obtain favorable con-

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182

90 Business Cycles

tract settlements, and their members are more willing to strike to get NOTthem. All these conditions apply to more and more firms and indus-tries and produce upward pressure on more and more prices. Indeed, 1,one of the principal factors underlying a rising rate of inflation in the shipgeneral price level is not just that some prices rise in big jumps but 2.that more prices rise at more frequent intervals. Eban

During periods of slow growth or actual decline in aggregate eco-nomic activity, the opposite conditions prevail. Firms and industriescut back their output, reduce or eliminate overtime, shave costs, give indebigger discounts off list prices, reduce inventories, repay bank debt, methand postpone new investment projects or stretch out existing ones. than,Quit rates decline, indicating that workers feel they must hang on to twe1their jobs, and labor demands for pay raises become more conserva- weatitive. Interest rates drop. As price increases become less widespread COUtS'

and less frequent, and as more price cutting takes place, the rate of flativinflation declines, of th

Since many of the processes sketched here are represented among rate.

the leading and lagging indicators, they can also be employed to remonitor inflation, evaluate its twists and turns, and judge its pros- 4pects. We hope, therefore, that this potential use for the indicators ter sipresented will not be overlooked.

FURTHER RESEARCH AND DEVELOPMENT

A continuing research and development program is essential if thesystem of international economic indicators described is to be usedeffectively and improved. As already noted, the Rutgers Center forInternational Business Cycle Research is conducting such a program.Coverage of the indicator system has already been extended to manyadditional countries, including Sweden, the Netherlands, Belgium,Switzerland, Australia, South Korea, and Taiwan. Attention is beinggiven to speedier access to data, new types of graphic displays, andother analytical tools. Methods of trend-adjusting current data arebeing tested,as well as methods of defining early warning signals ofrecession and recovery. Detecting an international recession prompt-ly and measuring its scope and severity, appraising trade prospects,and getting early warning signals of new inflationary trends are mat-ters of vast consequence to the peoples of the world. If the contentsof this book contributes to these tasks, it will have served its end.

An Introduction to International Economic Indicators 91

get NOTES TO CHAPTER 6

[us-

ed 1. For a list of NBER publications that explain the behavior of and relation-the ships among particular indicators, see Chapter 21.

2. The method of trend-fitting is described in Charlotte Boschan and Walterbu Ebanks, "The Phase-Average Trend: A New Way of Measuring EconomicGrowth," In Proceedings of the Business and Economics Statistics Section,

C0 American Statistical Association, 1978.nes 3. The growth rates are calculated by taking the ratio of the current month'siive index to the average index for the twelve months ending six months ago. Thisbt, method produces a rate of growth (or decline) that is similar to but smootheres. than, the percentage change in the index from the same month a year ago. Theto twelve-month average smooths away erratic factors, such as a strike or unusual

rva- weather, that may have affected the year-ago figure. The method does not, ofead course, smooth out any erratic influences affecting the current month. An alter-

of native method is to take the ratio of the current months's index to the averageof the twelve immediately preceding months, and express the result at an annualrate. This gives a more up-to-date estimate of the growth rate than the one

ong shown in Figure 6-3, but also is more affected by erratic movements in the cur-I to rent month.rOs- 4. Recession-Recovery Watch has been a bimonthly publication of the Cen-tors ter since 1979.

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