A New Index of the Business Cycle

20 Pages Posted: 21 Jan 2020

See all articles by William B. Kinlaw

William B. Kinlaw

State Street Global Markets

Mark Kritzman

Massachusetts Institute of Technology (MIT) - Sloan School of Management

David Turkington

State Street Associates

Date Written: January 15, 2020

Abstract

The authors introduce a new index of the business cycle that uses the Mahalanobis distance to measure the statistical similarity of current economic conditions to past episodes of recession and robust growth. Their index has several important features that distinguish it from the Conference Board’s leading, coincident, and lagging indicators. It is efficient because as a single index it conveys reliable information about the path of the business cycle. Their index gives an independent assessment of the state of the economy because it is constructed from variables that are different than those used by the NBER to identify recessions. It is strictly data driven; hence, it is unaffected by human bias or persuasion. It gives an objective assessment of the business cycle because it is expressed in units of statistical likelihood. And it explicitly accounts for the interaction, along with the level, of the economic variables from which it is constructed.

Keywords: Business cycle, Coincident indicator, Conference Board, KKT Index, Lagging indicator, Leading indicator, Mahalanobis distance, NBER, Robust growth, Recession, Statistical similarity, Yield curve

JEL Classification: C18, C24, C32, C34, C53, C54, C65, E61, E62, E63, E66, G11, G18

Suggested Citation

Kinlaw, William B. and Kritzman, Mark and Turkington, David, A New Index of the Business Cycle (January 15, 2020). MIT Sloan Research Paper No. 5908-20. Available at SSRN: https://ssrn.com/abstract=3521300 or http://dx.doi.org/10.2139/ssrn.3521300

William B. Kinlaw

State Street Global Markets ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

Mark Kritzman (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

David Turkington

State Street Associates ( email )

United States

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