Unit 1 · Level 2 · The business cycle
The dashboard
Nobody can see the whole economy, so we watch gauges: GDP for output, unemployment for jobs, PMI surveys for what factory and service managers see right now. The crucial trick is knowing which gauges LEAD the economy and which LAG behind it. Mixing them up is like driving while staring into the rear-view mirror.
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What you get asked
What does GDP actually measure?
GDP is a flow: everything produced in a period, not everything owned. A country can be wealthy (lots of accumulated assets) while its GDP growth is weak, and vice versa.
A PMI reading above ___ signals that factories and services report expanding activity.
PMI is a monthly survey of purchasing managers. Above 50 means more of them see improvement than deterioration; below 50 means contraction. It's watched because it arrives fast, long before GDP.
Match each indicator to what it tells you
Each gauge has a time zone. GDP tells you where you WERE, unemployment confirms it, while PMIs and permits hint at where you're GOING.
Why is the unemployment rate a LAGGING indicator?
Hiring and firing are expensive and slow, so companies act only once a slowdown or recovery is undeniable. By the time unemployment peaks, the recovery has usually already begun.
Which set contains only LEADING indicators?
Markets, orders and permits reflect decisions about the FUTURE, so they move first. They're noisy and sometimes wrong, but they whisper early while the laggards shout late. 🐜
The rest of this unit
Learn the economy's heartbeat: expansion, peak, recession, recovery.