Limitations of the Leading Economic Index in Forecasting

Very Hard Economic Analysis Forecasting Tools

In the context of developing a dynamic asset allocation strategy, you are reviewing various economic forecasting tools. One such method your team is considering is the Leading Economic Index (LEI). The LEI is designed to signal peaks and troughs in the business cycle and thus can inform strategic decisions regarding asset allocation. However, the application and effectiveness of the LEI can depend on different underlying market conditions and other macroeconomic indicators.

As the head of the team, you want to determine the most appropriate forecasting tool for predicting economic performance over the next 6 to 12 months. Which of the following statements accurately describes a key limitation of the Leading Economic Index?

The LEI can be influenced by short-term fluctuations in economic data, leading to false signals.

The LEI is primarily based on historical data and fails to incorporate current economic conditions.

The LEI can only predict recession periods and is ineffective in identifying expansion phases.

Hint

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