Explain whether each of the following variables is a lagging, leading, or coincident indicator: In each case, is the economy likely in a recession, heading for a recession, in an expansion, or heading for an expansion?

Question

a. Industrial production is falling.
b. The number of building permits issued for new private housing units begins to decline.
c. The number and amount of commercial and industrial loans start to rise.
d. The average prime interest rate charged by banks begins to fall.
e. The M2 money supply begins to rise.

Answer 1

a. Industrial production is a coincident indicator, as it tends to rise and fall at the same time as real GDP and other measures of aggregate economic activity. Since industrial production is falling, the economy is likely in a recession.
b. The number of building permits issued for new private housing units is a leading indicator, as it tends to rise and fall in advance of real GDP and other measures of aggregate economic activity. Since the number of issued permits is beginning to decline, the economy is likely heading for a recession.
c. Commercial and industrial loans are lagging indicators, as they tend to rise and fall after real GDP and other measures of aggregate economic activity. Since these loans are starting to rise, the economy is likely already in an expansion.
d. The average prime interest rate charged by banks is a lagging indicator, as it tends to rise and fall after real GDP and other measures of aggregate economic activity. Since the prime rate is beginning to fall, the economy is likely already in a recession.
e. The M2 money supply is a leading indicator, as it tends to rise and fall in advance of real GDP and other measures of aggregate economic activity. Since M2 is beginning to rise, the economy is likely heading for an expansion.