CFA Level I · CFA Level I Exam · Understanding Business Cycles
An analyst observes that a widely used leading indicator index has declined for several months, yet the economy then avoids a recession. This outcome is best described as a:
This is best described as a false signal, a recognized limitation of leading indicators. They can warn of a downturn that never materializes, and their lead time also varies. Since no recession occurred, no peak or trough was confirmed by coincident or lagging series.
- Alagging confirmation of an earlier trough
- Bcoincident signal of a peak in activity
- Cfalse signal, a known limitation of leading indicatorsCorrect
Explanation
Leading indicators do not predict every turning point correctly. They sometimes signal a downturn that never arrives, which is a false signal. The lag and coincident descriptions do not fit since no turning point happened.
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