Forecasting with the Index of Leading Indicators

43 Pages Posted: 27 Apr 2000 Last revised: 3 Sep 2022

See all articles by Beatrice N. Vaccara

Beatrice N. Vaccara

National Bureau of Economic Research (NBER)

Victor Zarnowitz

The Conference Board; National Bureau of Economic Research (NBER); University of Chicago

Date Written: May 1978

Abstract

The composite index of leading indicators is found to be a valuable tool for predicting not only the direction but also the size of near- term changes in aggregate economic activity. This conclusion is based on assessments of the leading index as a predictor of (1) business cycle turning points as dated by the National Bureau of Economic Research and (2) quantitative changes in real GNP and the composite index of coincident indicators. Specific smoothing rules are identified which reduce the frequency of false signals but still provide adequate early warning of cyclical turning points. Simple regression models based on first differences in the logarithms produce a comparatively good record of forecasts one and two quarters ahead. The best results are obtained by using predictive chains whereby, e.g., quarterly changes in the lagging index (inverted) for Q[sub t] are used to forecast changes in the leading index in quarter Q which in turn are used to forecast changes in real GNP (or the coincident index) in Q[sub t+2].

Suggested Citation

Vaccara, Beatrice N. and Zarnowitz, Victor, Forecasting with the Index of Leading Indicators (May 1978). NBER Working Paper No. w0244, Available at SSRN: https://ssrn.com/abstract=226649

Beatrice N. Vaccara

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