WHY THE COMPOSITE INDEX OF LEADING INDICATORS DOES NOT LEAD

This paper assesses the real-time performance of the Commerce Departme nt'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 l eading index's transition from expansion to contraction generally is n ot very sharp. Consequently, discerning real-time cyclical peaks in th e index is difficult. Transitions from contraction to expansion on ave rage are sharp. However, cyclical troughs in the leading index often p recede cyclical troughs in the economy by only a few months. Thus, eve n timely recognition of troughs in the leading index fails to provide advance warning of turnarounds in the general level of economic activi ty.