Financial reporting analysis 4

CFA Level I FRA
#1

Current economic statistics indicating little change in services inflation, rising residential building permits, and increasing average duration of unemployment are best interpreted as:

  1. conflicting evidence about the direction of economy.
  2. evidence that a cyclical upturn is expected to occur in the future.
  3. evidence that a cyclical downturn is expected to occur in the future.

Solution

B is correct. Rising building permits—a leading indicator—indicates that an upturn is expected to occur or continue. Increasing average duration of unemployment—a lagging indicator—indicates that a downturn has occurred, whereas the lack of any change in services inflation—also a lagging indicator—is neither negative nor positive for the direction of the economy. Taken together, these statistics indicate that a cyclical upturn may be expected to occur.

Understanding Business Cycles Learning Outcome

#2

It looks like the question is just asking whether you remember which one is a leading indicator versus which one is a lagging indicator. That’s the basis of their solution rationale.

When a leading indicator (predicts future) conflicts with a lagging indicator (showing what has happened), the point they are making is that change is perhaps coming. The future is signalling it may be different from the present/past.