Forecasting industrial production and the early detection of turning points

In this paper we propose a simple model to forecast industrial production in Italy up to 6 months ahead. We show that the forecasts produced using the model outperform some popular forecasts as well as those stemming from an ARIMA model used as a benchmark and those from some single equation alternative models. We show how the use of these forecasts can improve the estimate of a cyclical indicator and the early detection of turning points for the manufacturing sector. This is of paramount importance for short-term economic analysis.The first draft of this paper was mostly prepared while Claudio Lupi was working as a Research Director at ISAE. The present version of the paper is a revision of a preliminary draft that was circulated under the same title as ISAE working paper 20/01. The authors would like to thank two anonymous referees, audiences at ISAE, Dublin (22nd International Symposium on Forecasting), and Ente Einaudi (econometrics seminars) for comments. Fruitful discussions and suggestions from Gianluca Cubadda, Sergio de Nardis, John FitzGerald, Antonio García-Ferrer, Franco Peracchi, and Tommaso Proietti are gratefully acknowledged. None of them is responsible for any remaining error. The opinions expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of ISAE or its staff.First revision received: Ocotber 2002/Final revision received: May 2003