Which of the following would be most useful as a leading indicator to signal the start of an economic recovery? A. An increase in aggregate real personal income (less transfer payments) B. A decrease in average weekly initial claims for unemployment insurance C. The narrowing of the spread between the 10-year Treasury yield and the federal funds rate Both B and C are leading indicators. The narrowing of the spread is a positive sign, so why is it not C? In my mind, I still don’t understand how weekly initial claims for unemployment insurance is a leading indicator. We read over and over and over again in the economic section about how companies are slow to react to economic situations when it comes to employment because it’s a costly thing, so they usually wait things out.
Usually the unemployment is measured over a longer term and hence it is lagging. However, seeing as this is weekly it is a leading indicator. Only thing I can think of but I would agree with you and would have said C…
I totally agree with you, I chose C as well. I read the CFI Econ text and clearly remember it saying that the market is a leading indicator. I can’t remember exactly what they said about weekly jobless claims, but u would think that they are lagging. I’ll have to look back at the text.
Why would you say C? :3
I was thinking that if employment was picking up, it’s because more orders were coming through, and the managers were hiring people in anticipation of new work coming in.
Double commented
I also could not understand why C is the answer over the others. Just thought I need to share an observation. When I read global news re the US economy, they usually mention whether there is a fall in unemployment insurance claims. It looks like the market is looking to it as a primary sign of an economic recovery. I am not sure whether it is a case of best practice or whatever.
INITIAL claims for unemployment is a leading indicator. AVERAGE duration is a lagging indicator.
The narrowing of the spread reflects people’s negative sentiments that the economy will deteriorate and thus rates will get lowered. If it widens then investors are bullish and expect the economy to improve thus causing rates to follow suit.
This is a tricky question. In the fixed income section it mentions a narrowing spread as a good economy and widening spread as a bad economy.
I guess the best way to tackle things like this (BEY also comes to mind) is to answer it according to the section of the curriculum.
I would have guessed B (yes, guess)…
Good explination tjack, I just looked at the CFI text and you are correct.
Per the CFI Text (pg. 321 in Econ):
Interest rate spread between 10-yr treas yields and fed funds rate : Because long-term yields express market expectations about the direction of short-term interest rates, and rates ultimately follow the economic cycle up and down, a wider spread, by anticipating short rate increases, also anticipates an economic upswing. Converselty, a narrower spread, by anticipating short rate decreases, also anticipates an economic downturn.
It also lists these as leading indicators:
- Average weekly hours, manufacturing
- Average weekly jobless claims for unemployment insurance
- Manufacturers’ new orders for consumer goods and materials
- Vendor performance, slower deliveries diffusion index
- Manufacturers’ new orders for non-defense capital goods
- Building permits for new private housing units
- S&P 500 Stock Index
- Money supply, real M2
- Interest rate spread between 10-yr and fed funds rate (mentioned above)
- Index of Consumer Expectations, University of Michigan
Indeed a tricky question 
Now I see why C is not the answer. But why can’t it be A? Does this mean we need to memorize those 10 leading indicators in order to rule out A?
According to CFI text aggregate real personal income (less transfer payments) is a Coincident (current) indicator.
I would almost think that real personal income is lagging because profits are paid out to employees after a good year.
These are tricky questions…
Thanks!