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This chapter is the result of attempts to find a way to extract as much information as possible about future economic activity from the twelve time-series commonly referred to as the leading indicators.
Leading indicators are data series that tend to lead business activity. Generally, it is believed that changes in certain economic variables precede, in a causal fashion, other economic variables. Because some of the leading series may produce false signals of future changes, it is also believed that an index composed of several of these leading series, chosen from a variety of economic processes, provides a better indication of future activity than any one series.
The most important of the single series used by business economists to forecast future economic activity is the so-called Index of Leading Indicators. This series is calculated by the Department of Commerce and published in the Survey of Current Business. The monthly announcements of the latest Index figure and the changes in the series composing it are major economic events. This chapter is an attempt both to test the forecasting ability of the Index and to create new indices that are more useful in forecasting peaks and troughs in the business cycle.
Section 11.1 is a review of some of the earlier attempts to use leading indicators to forecast economic activity. In section 11.21 present the theoretical basis for my own research and the results of my attempts to use the indicator series to forecast turning points in the business cycle. Section 11.3 presents my conclusions.
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