WHY THE COMPOSITE INDEX OF LEADING INDICATORS DOES NOT LEAD

This paper assesses the real-time performance of the Commerce Department's composite index of leading indicators. The authors find that the composite leading index has failed to provide reliable advance warning of cyclical turning points. One reason for this failure is that the leading index's transition from expansion to contraction generally is not very sharp. Consequently, discerning real-time cyclical peaks in the index is difficult. Transitions from contraction to expansion on average are sharp. However, cyclical troughs in the leading index often precede cyclical troughs in the economy by only a few months. Thus, even timely recognition of troughs in the leading index fails to provide advance warning of turnarounds in the general level of economic activity .     

Book Reviews

Barbara Harriss-White, India Working: Essays on Society and Economy.
Phillipp Schofield, Peasant and Community in Medieval England, 1200–1500.
Nicola Verdon, Rural Women Workers in 19th Century England: Gender, Work and Wages.
Jonathan R. Pincus and Jeffrey Winters (eds), Reinventing the World Bank.
Julie A. Charlip, Cultivating Coffee: The Farmers of Carazo, Nicaragua, 1880–1930.
Monica M. van Beusekom, Negotiating Development: African Farmers and Colonial Experts at the Office du Niger, 1920–1960.
Abdul Rahman Embong, State-led Modernization and the New Middle Class in Malaysia.
David M. Anderson, Eroding the Commons: The Politics of Ecology in Baringo, Kenya 1890s–1963.
Jan Breman and Gunawan Wiradi, Good Times and Bad Times in Rural Java: Case Study of Socio-Economic Dynamics in Two Villages Towards the End of the Twentieth Century.
Mario Rutten, Rural Capitalists in Asia: A Comparative Analysis on India, Indonesia and Malaysia.     

Credit Indicators as Predictors of Economic Activity: A Real‐Time VAR Analysis

Using readily available indicators of the profitability, price, and availability of credit—the term spread, junk‐bond spread, and banks’ “willingness to lend” as reported by the Federal Reserve—we show that it is possible to significantly improve on the real‐time output and employment predictions of forecasting professionals at the medium‐run horizons that are most relevant to policymakers and private decision makers. Key to this improvement is a flexible state–space model of data revisions. The willingness‐to‐lend variable is the best real‐time predictor of GDP growth. For forecasting job growth, all three credit indicators prove helpful.     

How Robust Are Popular Models of Nominal Frictions?

We consider alternative combinations of nominal price and wage frictions in dynamic stochastic general equilibrium models fit to U.S. data. Since inflation was unanchored in the 1970s, we divide the data into early, middle, and late samples (1955–68, 1969–79, and 1983–2007, respectively). We find that prices are reoptimized more frequently and exhibit greater indexation to past inflation in the middle sample than in the other two samples, while wages are reoptimized with increasing frequency and display less evidence of indexation over time. Differences in price and wage setting across samples have important implications for the economy's response to key shocks.