Business Cycle Indicators (BCI)

What Are Business Cycle Indicators (BCI)?

Business cycle indicators (BCI) are a composite of leading, coincident, and lagging indexes created by the Conference Board and used to forecast, date, and confirm changes in the direction of the overall economy of a country. They are published on a monthly basis and can be used to measure the peaks and troughs of the business cycle.

Understanding Business Cycle Indicators (BCI)

Economies do not generally grow at a consistent linear or exponential rate, but instead experience periods of faster or slower growth as well as occasional episodes of outright decline in economic activity. These quasi-periodic fluctuations of economic activity, such as production and employment, are known as business cycles. There's usually a rise in activity that reaches a high point, or peak, followed by a decline in output and employment until the economy reaches a bottom, known as a trough.

Although past business cycles may show patterns that are likely to be repeated to some degree, the timing of peaks and troughs in business cycles aren't always predictable. Understanding, predicting, and overcoming the volatility of these cycles is a major focus of research by economists, public policymakers, and private investors.

One prominent avenue of this research has been the measurement and dating of trends and turning points in economic data and statistics. From this research, numerous sets of indicators have been constructed.

History of Business Cycle Indicators

Wesley Mitchell and Arthur Burns at the National Bureau of Economic Research (NBER) were responsible for compiling the first set of BCI and using them to analyze economic boom and bust cycles during the 1930s. According to the NBER, there were a total of eleven business cycles between 1945 and 2009.

The U.S. Department of Commerce began publishing BCI during the 1960s. The task of compiling and publishing the indicators was privatized in 1995, with the Conference Board being made responsible for the report.

Interpreting Business Cycle Indicators

Interpretation of BCI involves much more than simply reading graphs. An economy is much too complex to be summarized with just a few statistics. Thus, investors, traders, and corporations must realize that it is unreasonable to believe that any single indicator, or even set of indicators, always gives true signals and never fails to foresee a turning point in an economy.

BCI are constructed by looking at a wide range of government and private sector data, which are statistically correlated with or logically related to national macroeconomic performance.

The Conference Board Business Cycle Indicators (BCI)

One of the most prominent and intensely watched set of BIC is that published by the Conference Board. This includes a full set of composite leading, coincident, and lagging indexes for various national economies.

Leading Business Cycle Indicators

Leading indicators measure economic activity in which shifts may predict the onset of a business cycle. Components of the index of leading indicators include average weekly work hours in manufacturing, factory orders for goods, housing permits, and stock prices. Changes in these metrics could signal a shift in the business cycle.

The Conference Board notes that leading indicators receive the most attention because of their strong tendency to shift in advance of a business cycle. Other leading indicator components include the index of consumer expectations, average weekly claims for unemployment insurance, and the interest rate spread. 

According to the Conference Board, leading indicators are most meaningful when they are included as part of a framework that includes coincident and lagging indicators as they help provide needed statistical context for understanding the true nature of economic activity.

Lagging Business Cycle Indicators

Lagging indicators confirm the trend that leading indicators predict. Lagging indicators shift after an economy has entered a period of fluctuation.

Components of the index of lagging indicators highlighted by the Conference Board include the average length of unemployment, labor cost per unit of manufacturing output, the average prime rate, the consumer price index (CPI), and commercial lending activity.

Coincident Business Cycle Indicators

Coincident indicators are aggregate measures of economic activity that shift as a business cycle progresses. Examples of coincident index components include the unemployment rate, personal income levels, and industrial production.