FORECASTING CYCLICAL TURNING-POINTS WITH AN INDEX OF LEADING INDICATORS - A PROBABILISTIC APPROACH

In this paper the econometrics of latent variables in conjunction with leading economic indicators are used to predict turning points of the US industrial production variable for various forecasting horizons. T he results reported here show that leading indicators used in regressi on models with a dichotomous dependent variable that marks periods of economic expansion and contraction forecast business cycle turning poi nts accurately. Leading indicators produce the most reliable forecasts of turning points five months prior to cyclical changes and do not gi ve any false signals. Moreover, the weights assigned to leading indica tors for producing the index vary as the forecast horizon changes.