Why do economic forecasters pay special attention to investment plans? Take a look at the Conference Board Organization's index of leading economic indicators on their web site.  Which of those...

Why do economic forecasters pay special attention to investment plans? Take a look at the Conference Board Organization's index of leading economic indicators on their web site.  Which of those indicators might affect investment?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The role of economic forecasters is to predict how the economy will be changing in the near future.  They try to figure out if the economy is going to grow or shrink and how rapidly it will do either of these things.  It is very important for economic forecasters to know about businesses’ investment plans because these plans will have a great deal to do with whether the economy will grow or shrink.  Let us examine why this is so.

In order for the economy to grow, it is generally necessary for businesses to invest.  In economic terms, “investment” refers to purchases of capital goods by businesses.  In other words, this is spending done by businesses to buy the sorts of things that allow them to produce more goods and services.  If, for example, an airline buys airplanes, it is investing.  If an automaker builds a new factory, it is investing.  When businesses invest, the economy will tend to grow.  This is because the businesses will tend to need more workers to use the new capital goods that they have purchased.  It is also because the new capital goods can be used to make more consumer goods.  This makes more money for the businesses.

Economic forecasters need to know about investment so they can predict the future of the economy.  They have to know whether investment is high, implying that the economy will expand or if it is low, implying that few new jobs will be produced. 

According to the Conference Board, the 10 leading economic indicators for the US economy are

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • ISM Index of New Orders
  • Manufacturers' new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index™
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions

Many of these indicators can affect investment.  For example, if average weekly hours in manufacturing are going up, businesses might soon need to buy more capital goods in order to keep all those workers working.  As another example, if consumer expectations are up, businesses might want to buy more capital goods in order to make more consumer goods.  They will figure that consumers are optimistic and will be ready to spend.  Therefore, they will invest so as to be ready to meet that demand.  

Sources:

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