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CFA Level I · CFA Level I Exam · Understanding Business Cycles

A composite leading index has declined for several consecutive months, but coincident indicators remain strong and employment is still growing. A cautious analyst's conclusion is most likely that:

The most appropriate conclusion is that a downturn is possible but needs confirmation. Leading indicators can give false signals and their lead times vary, while strong coincident data show the economy has not yet turned. It is not a trough, and leading indicators are not infallible.

  1. Athe economy is in a trough and a recovery has just started.
  2. Ba downturn is possible, but leading indicators can give false signals, so confirmation is needed.Correct
  3. Cthe economy has already entered recession, because leading indicators never give false signals.

Explanation

Falling leading indicators suggest a possible future slowdown, but they have given false signals and vary in lead time. Strong coincident data show the economy has not yet turned, so confirmation is prudent. A trough reading is inconsistent with strong employment, and the claim of no false signals is wrong.

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