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Predicting U.S. Recessions: Financial Variables as Leading Indicators

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Author Info
Arturo Estrella
Frederic S. Mishkin

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Abstract

This article examines the performance of various financial variables as predictors of subsequent U.S. recessions. Series such as interest rates and spreads, stock prices, currencies, and monetary aggregates are evaluated singly and in comparison with other financial and non-financial indicators. The analysis focuses on out-of-sample performance from 1 to 8 quarters ahead. Results show that stock prices are useful with 1-2 quarter horizons, as are some well-known macroeconomic indicators. Beyond 2 quarters, the slope of the yield curve emerges as the clear choice, and typically performs better by itself out of sample than in conjunction with other variables.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5379.

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Date of creation: Jun 1999
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Handle: RePEc:nbr:nberwo:5379

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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  1. Frederic S. Mishkin, 1991. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
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  3. James H. Stock & Mark W. Watson, 1992. "A procedure for predicting recessions with leading indicators: econometric issues and recent performance," Working Paper Series, Macroeconomic Issues 92-7, Federal Reserve Bank of Chicago.
  4. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January. [Downloadable!] (restricted)
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  5. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June. [Downloadable!] (restricted)
  6. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Boldin, Michael D, 1994. "Dating Turning Points in the Business Cycle," Journal of Business, University of Chicago Press, vol. 67(1), pages 97-131, January. [Downloadable!] (restricted)
  8. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14. [Downloadable!]
  9. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December. [Downloadable!] (restricted)
  10. Fernando Barran & Virginie Coudert & Benoit Mojon, 1995. "Interest Rates, Banking Spreads and Credit Supply : The Real Effects," Working Papers 1995-01, CEPII research center. [Downloadable!]
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  11. Robert D. Laurent, 1989. "Testing the "spread"," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 22-34. [Downloadable!]
  12. Mark W. Watson, 1991. "Using econometric models to predict recessions," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 14-25. [Downloadable!]
  13. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
  14. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York. [Downloadable!]
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  15. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February. [Downloadable!] (restricted)
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