The table entitled "Experimental Coincident, Leading and Recession Indexes" shows the values of the Experimental Coincident, Leading, and Recession for the indicated month, based on data available on the release date. Revised values of these statistics for earlier months, computed using the revised data for earlier months, are given in the second section of the table. The table also shows the contributions of each of the seven components of the Experimental Leading Index (plus trend) to the total Experimental Leading Index.
The Experimental Coincident Index is a weighted average of four broad monthly measures of U.S. economic activity:
1. Industrial Production
2. Real personal Income, total, less transfer payments
3. Real manufacturing and trade sales, total
4. Total employee-hours in nonagricultural establishments
The weighted average is computed using current and recent values of the growth rates of these four series. This weighted average, in growth rates, is then cumulated to create an index in levels. The index is constructed so that it equals 100 in July 1967. The average monthly rate of growth in the Experimental Coincident Index is 3.0% at an annual rate. Thus the Experimental Coincident Index has approximately the same trend growth rate as real GNP, which grew at an average annual rate of 3.1% from 1960 to 1988. The Experimental Coincident Index is approximately one and one half times more volatile than real GNP: the standard deviation of quarterly growth (at annual rates) in the Experimental Coincident Index is 5.5% while the corrresponding standard deviation for real GNP is 3.9%.
The Experimental Leading Index is a forecast of the growth of the Experimental Coincident Index over the next six months (that is, for the six months subsequent to the month for which the data is available). The forecast is stated in percentage terms on an annual basis. Thus, for example, the Experimental Leading Index for April represents a forecast of the percent growth in the Experimental Coincident Index between April and October, at annual rates.
The Experimental Leading Index is a weighted average of seven leading indicators. These series, with their abbreviations used in the table, are:
1. Housing BP: Housing authorizations (building permits) -- new private housing.
2. MD Unf Ord: Real manufacturers unfilled orders: durable goods industries (smoothed).
3. Exchange Rates: Trade-weighted index of nominal exchange rates between the U.S. and the U.K., Germany, France, Italy, and Japan (smoothed).
4. Part Tim Wk: Number of people working part-time in nonagricultural industries because of slack work (smoothed).
5. 10Yr TBond Rate: The yield on a constant-maturity portfolio of 10-yr U.S. Treasury bonds (smoothed).
6. 3mtCP,3mtTB Spr: The spread (difference) between the interest rate on 3-month commercial paper (financial) and the interest rate on 3 month U.S. Treasury bills.
7. 10yrTB,1yrTB Spr: The spread (difference) between the yield on constant-maturity portfolio of 10-yr U.S. Treasury bonds and the yield on 1-year U.S. Treasury bonds.
The table contains a section entitled "Components of the Experimental Leading Index". These values represent the contribution of each of these seven leading indicators to the total index in the indicated month, relative to trend. Because these contributions are relative to trend, their average contribution is zero over the period 1960-1988. The contribution to the index that arises from "trend" growth in the coincident variables over the next six months is entered separately as "trend".
The Experimental Recession Index is an estimate of the probability that the economy will be in a recession six months from the date of the index. For example, the Experimental Recession Index for April gives the probability that the economy will be in a recession in October. The Experimental Recession Index is computed using four monthly series in the Experimental Coincident Index and the seven monthly series in the Experimental Leading Index.
The Experimental Recession Index represents a probability. For example, if the Experimental Recession Index is 25%, then the probability of the economy being in a recession in six months in 25%. The lowest possible value of the Experimental Recession Index is 0% and the highest is 100%.
The XRI-2 is an alternative recession index based on seven leading indicators that exclude interest rates and interest rate spreads. The method used to construct the XRI-2 is the same as for the XRI; the difference between the XRI and XRI-2 is the underlying series used to construct the two indexes. The seven series used to construct the XRI-2 are:
1. Housing authorizations (building permits) -- new private housing (also used in XRI).
2. Real manufacturers unfilled orders: durable goods industries (smoothed) (also used in XRI).
3. Exchange Rates: trade-weighted index of nominal exchange rates between the U.S. and the U.K., Germany, France, Italy, and Japan (smoothed) (also used in XRI).
4. Help wanted advertising: index of help wanted advertising in newspapers).
5. Average weekly hours of production workers, durable goods industries.
6. Vendor Performance: percent of companies reporting slower deliveries; National Associate of Purchassing Managers).
7. Capacity utilization rate in manufacturing.
Stock, James H. and Mark W. Watson, "Indexes of Coincident and Leading Economic Indicators," NBER Reporter, Spring 1989, pp. 3-5.
Stock, James H. and Mark W. Watson, "New Indexes of Coincident and Leading Economic Indicators," NBER Macroeconomics Annual 1989, pp. 351-394.
These are available from the Publications Department, NBER, 1050 Massachusetts Ave., Cambridge, MA 02138; telephone (617) 868-3900.