Long-leading versus short-leading indicators

Most of the leading indicators that have been in use for many years have relatively short leads, averaging about six or eight months at business cycle peaks, when recessions begin, and two to four months at troughs, when recoveries start. Since there are often delays of a month or so in reporting the figures, and even longer delays in judging whether a turn in an indicator is significant, a recession or recovery may be well under way before it can be recognized. One way to deal with this problem is to distinguish indicators with exceptionally long leads from others.

The new long-leading index currently published by the Center for International Business Cycle Research takes a step in this direction. Using the revised list of fifteen leading indicators (Moore, 1989), we classified as long-leading those that had average leads of at least twelve months at peaks and six months at troughs during 1948–82. The four indicators that qualified as long-leading were bond prices, real money supply (M2), new building permits for housing, and a profit margin indicator, the ratio of prices to unit labor costs in manufacturing. A longleading index constructed from these series is shown in Figure 8.1, together with the short-leading index based on the other eleven series. Also shown is the Department of Commerce leading index as revised in March 1989, which contains two of the series in our long-leading group (money supply and housing permits), seven series in our short-leading group, and two other series.