Working Paper: NBER ID: w0761
Authors: Alan J. Auerbach
Abstract: The index of leading economic indicators first developed by the NBER remains a popular informal forecasting tool in spite of the original criticism that its use represents "measurement without theory. " This paper seeks to evaluate the performance of the index in comparison to alternative time series methods in predicting business cycle behavior. While the actual method of choosing the weights for the twelve series included in the index is essentially unnecessary (because the resulting series is indistinguishable from another with uniform weights) the series itself helps explain business cycle behavior, and outperforms an index with econometrically chosen weights.
Keywords: Leading Indicators; Business Cycles; Forecasting
JEL Codes: C53; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| index of leading indicators (C43) | unemployment rate (J64) |
| index of leading indicators (C43) | Federal Reserve Board's index of industrial production (L16) |
| index of leading indicators (C43) | cyclical variables (E32) |
| jointly estimated index (C43) | predictive power (C52) |
| equal-weight procedure (D79) | smooth out fluctuations (E32) |