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Real-time macroeconomic forecasting with leading indicators: An empirical comparison

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  • Heij, Christiaan
  • van Dijk, Dick
  • Groenen, Patrick J.F.

Abstract

This paper demonstrates that the Conference Board's Composite Leading Index (CLI) has significant real-time predictive ability for Industrial Production (IP) growth rates at horizons from one to six months ahead over the period 1989-2009. A popular but unrealistic analysis, which combines real-time data for CLI and final vintage data for IP as predictor variables, obscures the actual predictive content of the CLI, in the sense that in that case, the improvements in forecast accuracy relative to a univariate AR model are not significant. The CLI appears to be less useful for forecasting growth rates of the Conference Board's Composite Coincident Index (CCI) in real time, as a univariate AR model performs better. This result is mostly due to its disappointing performance during the first five years of the forecast period. The CLI may not be the best way of exploiting the information contained in the underlying individual leading indicator variables. The use of principal components instead of CLI leads to more accurate real-time forecasts for both IP and CCI growth rates.

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  • Heij, Christiaan & van Dijk, Dick & Groenen, Patrick J.F., 2011. "Real-time macroeconomic forecasting with leading indicators: An empirical comparison," International Journal of Forecasting, Elsevier, vol. 27(2), pages 466-481, April.
    • Handle: RePEc:eee:intfor:v:27:y::i:2:p:466-481
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    3. Alessandro Girardi & Roberto Golinelli & Carmine Pappalardo, 2017. "The role of indicator selection in nowcasting euro-area GDP in pseudo-real time," Empirical Economics, Springer, vol. 53(1), pages 79-99, August.
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    7. Jianhao Lin & Jiacheng Fan & Yifan Zhang & Liangyuan Chen, 2023. "Real‐time macroeconomic projection using narrative central bank communication," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 202-221, March.
    8. Soh, Ann-Ni, 2020. "A Review on the Leading Indicator Approach towards Economic Forecasting," MPRA Paper 103854, University Library of Munich, Germany.
    9. Golinelli, Roberto & Parigi, Giuseppe, 2014. "Tracking world trade and GDP in real time," International Journal of Forecasting, Elsevier, vol. 30(4), pages 847-862.
    10. Stavros Degiannakis, 2023. "The D-model for GDP nowcasting," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 159(1), pages 1-33, December.
    11. Liebermann, Joelle, 2012. "Real-time forecasting in a data-rich environment," MPRA Paper 39452, University Library of Munich, Germany.

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