The composite index of leading economic indicators: A comparison of approaches

Article type: Research Article

Authors: Phillips, Keith R.^{a; *}

Affiliations: [a] San Antonio Branch, Federal Reserve Bank of Dallas, P.O. Box 1471, San Antonio, Texas 78295, USA. Tel.: +1 210 978 1409; Fax: +1 210 978 1429; E-mail: keith.r.phillips@dal.frb.org

Correspondence: [*] The author thanks James Stock and Mark Watson for providing data that was necessary for the replication of some of their original results. This paper does not represent the official views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Abstract: I compare the real-time recession predicting performance of the Conference Board Leading Index, the Stock and Watson Leading Index, and the yield curve in the period since 1988. I first calculate the real-time probability of recession for the yield curve and Conference Board Leading Index using a simple non-linear regime-switching model. I then compare these estimates to the probability of recession published by Stock and Watson. The Conference Board Leading Index gave the strongest signal of recession in the six months prior to the 1990--1991 recession and gave no false signals in the 1990s. The Stock and Watson Leading Index failed to give recession signals in the first half of 1990 and the yield curve may have given a false signal in early 1999. The results show that the traditional leading index is still a useful tool for monitoring the ebb and flow of regional and national economies.

DOI: 10.3233/JEM-1999-0169

Journal: Journal of Economic and Social Measurement, vol. 25, no. 3-4, pp. 141-162, 1999