New Indexes of Coincident and Leading Economic Indicators

44 Pages Posted: 19 Jun 2004

See all articles by James H. Stock

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Mark W. Watson

Princeton University - Princeton School of Public and International Affairs; National Bureau of Economic Research (NBER)

Date Written: April 1990

Abstract

During six weeks in late 1937, Wesley Mitchell, Arthur Burns, and their colleagues at the National Bureau of Economic Research developed a list of leading, coincident, and lagging indicators of economic activity in the United States as part of the NBER research program on business cycles. Since their development, these indicators, in particular the leading and coincident indexes constructed from these indicators, have played an important role in summarizing and forecasting the state of macroeconomic activity.

The paper reports the results of a project to revise the indexes of leading and coincident economic indicators using the tools of modern time series econometrics. This project addresses three central questions. The first is conceptual: is it possible to develop a formal probability model that gives rise to the indexes of leading and coincident variables? Such a model would provide a concrete mathematical framework within which alternative variables and indexes could be evaluated. Second, given this conceptual framework, what are the best variables to use as components of the leading index? Third, given these variables, what is the best way to combine them to produce useful and reliable indexes?

The results of this project are three experimental monthly indexes: an index of coincident economic indicators (CEI), an index of leading economic indicators (LEI), and a Recession Index. The experimental CEI closely tracks the coincident index currently produced by the Department of Commerce (DOC), although the methodology used to produce the two series differs substantially. The growth of the experimental CEI is also highly correlated with the growth of real GNP at business cycle frequencies. The proposed LEI is a forecast of the growth of the proposed CEI over the next six months constructed using a set of leading variables or indicators. The Recession Index, a new series, is the probability that the economy will be in a recession six months hence, given data available through the month of its construction.

This article is organized as follows. Section 2 contains a discussion of the indexes and a framework for their interpretation. Section 3 presents the experimental indexes, discusses their construction, and examines their within-sample performance. In Section 4, the indexes are considered from the perspective of macroeconomic theory, focusing in particular on several salient series that are not included in the proposed leading index. Section 5 concludes.

Suggested Citation

Stock, James H. and Watson, Mark W., New Indexes of Coincident and Leading Economic Indicators (April 1990). Available at SSRN: https://ssrn.com/abstract=227144

James H. Stock (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Mark W. Watson

Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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