The Index of Leading Indicators: "Measurement Without Theory," Twenty-Five Years Later
23 Pages Posted: 2 Aug 2010 Last revised: 27 Dec 2011
Date Written: September 1981
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.
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