A Procedure for Predicting Recessions With Leading Indicators: Econometric Issues and Recent Experience
This paper examines the forecasting performance of various leading economic indicators and composite indexes since 1988. in particular during the onset of the 1990 recession. The primary focus is on an experimental recession index (tile "XRI"). a composite index which provides probabilistic forecasts of whether the U.S. economy will be in a recession six months hence. After detailing its construction, the paper examines the out-of-sample performance of the XRI and a related forecast of overall economic growth. the experimental leading index (XLI). These indexes performed well from 1988 through the summer of 1990 - for example. in June 1990 the XLI model forecasted a .4% (annual rate) decline in the experimental coincident index from June through September. when in fact the decline was only slightly greater,.8%. However. the XLI failed to forecast the sharp declines of October and November 1990. After exploring several possible explanations. we conclude that one important source of the forecast error was the use of financial variables during a recession that was not associated with a particularly tight monetary policy. Financial indicators -- and the experimental index -- were not alone. however. in failing to forecast the 1990 recession, An examination of 45 economic indicators shows that almost all failed to forecast the 1990downturn. and the few that did provided unclear signals before the recessions of the 19705 and 1980s.
|Date of creation:||Mar 1992|
|Publication status:||published as Business Cycles, Indicators and Forecasting, eds. James H. Stock and Mark W . Watson, Studies in Business Cycles, No. 28, Chicago: University of Chicago Press, 1993|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Singleton, Kenneth J, 1980. "A Latent Time Series Model of the Cyclical Behavior of Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 559-575, October.
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- Zarnowitz, Victor & Moore, Geoffrey H, 1982. "Sequential Signals of Recession and Recovery," The Journal of Business, University of Chicago Press, vol. 55(1), pages 57-85, January.
- James H. Stock & Mark W. Watson, 1989.
"New Indexes of Coincident and Leading Economic Indicators,"
in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409
National Bureau of Economic Research, Inc.
- Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
- Saul H. Hymans, 1973. "On the Use of Leading Indicators to Predict Cyclical Turning Points," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 339-384. Full references (including those not matched with items on IDEAS)
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