Important Leading Indicators
Housing starts. Housing starts are the number of new construction projects that have begun in the last month.
During a recession, new construction slows considerably. When a family believes it can invest in a new house or a business believes it can invest in a new building, this is an indication that economic confidence has improved, and it may be a signal that the recession is ending.
Once building permits have been granted and new projects begin, builders buy materials and hire new workers, which lead to increased manufacturing and employment. Thus, an increase in housing starts is a good indication that a contraction phase may be ending.
Conversely, a downturn in housing starts can indicate the beginning of an economic decline and possibly the onset of a contractionary period. When faced with a reduction in housing starts, the Federal Reserve may lower interest rates in an effort to make borrowing less expensive to businesses and potential homeowners, thereby stalling a possible contraction.
Other leading indicators:
- • Business inventories (growing inventories signal a contraction because businesses are not selling their inventory as quickly)
- • Initial claims fo