Economics question?

Question

The index of leading indicators has predicted all past recessions.
Nonetheless, it's not especially useful for predicting recessions.
Explain.

Answer 1

Hindsight, bloody hindsight.

To say "the Index of Leading Indicators" has predicted all past recessions is a jump, I'd say. All the index tells you is whether a pack of data streams is up or down relative to some other point in the past. A true analysis (if you follow business cycle theory) would require you to estimate where the 'break' would occur and how rapidly it follows the signs. Then you have to make sure you're not looking at false warnings (which can happen).

It is difficult to predict a recession because (I follow this theory) each recession is a different animal. The recession in 1978-9 was due to oil shocks. The recession in 1982 was due to an interest rate crunch. The recession in 1991 was due to several factors, including a mini-market crash and the slowdown of activity following the termination of a war and the return of half a million working persons to an economy already running at near-full steam. The recession in 2001 was precipitated by the stock market crash (NOT related to 9/11, as some who don't remember it will say), perpetuated by the terrorist attacks, and finally ended due to cheap credit.

Since each recession is a different animal, you have to watch which animal becomes the bear.

Answer 2

if you predict that tomorrows weather will be the same as today's, you will be right 75% of the time. the current forcasts are only right 66% of the time. that is with all of science and the best experts working on it. if you think enough with common sense, and i'm sure you do.. your gut will be right. DO NOT listen to the "experts".