Evaluating and Comparing Leading and Coincident Economic Indicators

Abstract

This article evaluates which economic indicators are the most useful for signaling recessions. The article uses a modified Markov switching method to compare the timing of recession signals across many indicators. In its present form, it is difficult to use the Markov switching methods for comparing recession signals across indicators. First, the regimes in the Markov switching method do not necessarily align with recession periods. Second, the definitions of the two regimes are likely to be different across indicators. However, if some modifications are made to the Markov switching method, the method can be helpful for comparing recession signals across indicators. This article shows that by converting Markov switching probabilities into percentiles, the Markov switching method can be useful in comparing the quality of recession signals across indicators. Using the method, hundreds of indicators are ranked based on their leading ability during different sample periods. Finally, the performance of the indicators during the current recession is evaluated.