To-date, all kinds of tools have been engaged by economists to forecast the economic cycle. However, the most applicable tool used so far is the "leading economic indicators" composite index.
Accordingly, if the said index rises for 3 consecutive months in a row during a recession period, it augurs that the economy will be heading for a recovery in 6 to 9 months' time.
Conversely, during an expansionary phase, should the "leading economic indicators" composite index record a fall for 3 consecutive months in a row, it is an indication that a slowdown in the economy is possible within the next 6 to 9 months' time.
US Leading Economic Indicators Composite Index comprises a wide range of components:
1. Prices for raw materials
2. The average work week
3. New orders for consumer goods
4. New orders for building permits
5. Stock prices
6. Orders for plant and equipment
7. Unemployment claims
8. Vendor performance
9. Money supply
10. Total liquid assets
11. Consumer expectations about the economy
Leading Economic Indicators Composite Index
UP -> 3 consecutive months -> economic growth
DOWN -> 3 consecutive months - > slow down/recession
Ref: Making Mistakes in the Stock Market by Wong Yee
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