a framework for measuring international business cycles.pdf

International Journal of Forecasting 17 (2001) 333348www.elsevier.com/ locate / ijforecast

A framework for measuring international business cyclesa , b*Anirvan Banerji , Lorene Hiris

aDirector of Research, Economic Cycle Research Institute, 420 Lexington Avenue, Suite 1645, New York, NY 10170, USAbProfessor of Finance, C. W. Post /Long Island University and Senior Research Scholar, Economic Cycle Research Institute,

720 Northern Blvd., Brookville, NY 11548, USA

Abstract

The classical measurement of business cycles, growth cycles, and growth rate cycles lies at the foundation for theunderstanding of macroeconomic dynamics in open market economies. This essay presents a framework for analyzing andforecasting cyclical behavior in economic activity, employment, and inflation. The framework is extended to foreign tradeand important domestic sectors of an economy such as manufacturing, services, and construction. This multidimensionalframework, which allows for a more in-depth analysis, serves as a model to be developed on a comparable basis acrosscountries. Business cycle and growth rate cycle reference chronologies, which have been determined for the majoreconomies, are presented in this context. 2001 International Institute of Forecasters. Published by Elsevier Science B.V.

Keywords: Business cycles; Growth rate cycles; International reference cycles; International reference chronologies; International cycledates; Turning points; Cyclical analysis; Forecasting; Leading indexes; Long leading indexes; Short leading indexes; Economic sectors;Inflation cycles; Employment cycles; Foreign trade; Exports; Imports

1. Introduction for a much more fine-grained, nuanced analysisof economic cycles. In fact, in the decades since

While the index of leading economic in- the LEIs creation, the general approach hasdicators (LEI) is still popularly perceived as the been refined under the guidance of its creator,chief forecasting tool available for predicting Geoffrey H. Moore, and applied in a consistentUS recessions and recoveries, it is not widely manner to a variety of economies.known that the classical National Bureau of One important finding is that leading in-Economic Research (NBER) approach may be dicators of business cycles, when used in theapplied within a multidimensional framework form of growth rates, also lead cyclical turns in

the growth rates of coincident indicators. Infact, it is useful to perform complementarycyclical analyses in terms of growth rate cycles.

*Corresponding author. Tel.: 1 1-212-557-7788; fax: In order to identify these business cycles and1 1-212-557-9874.growth rate cycles, we first present the definingE-mail address: [email protected] (A.

Banerji). characteristics of economic cycles, including

0169-2070/01/$ see front matter 2001 International Institute of Forecasters. Published by Elsevier Science B.V.PI I : S0169-2070( 01 )00089-9

334 A. Banerji, L. Hiris / International Journal of Forecasting 17 (2001) 333 348

cyclical co-movements and stable sequences of and recoveries). By the end of the 1960s,leads and lags in cyclical indicators. however, many industrial economies had not

Next, a multidimensional framework that experienced a recession for many years. Thispermits more in-depth monitoring through a led some observers to question whether thecloser look at three key aspects of the economy business cycle was still in existence (Bronfen- aggregate economic activity (the traditional brenner, 1969). Subsequently, there was a movedomain of the LEI), inflation, and employment among students of business cycles to study the is described. Aggregate economic activity growth cycle, which based cyclical analysis onmay be divided into foreign trade and domestic the deviations in economic activity from trendeconomic activity. The latter, in turn, can be (Mintz, 1969). A few years later when thesubdivided into the major sectors of the OECD developed leading indicators for itseconomy services, manufacturing and con- member countries, it decided to monitor thesestruction. Each of these areas exhibits distinct growth cycles. Growth cycle analysis alsoeconomic cycles, marked by the co-movement formed the basis for the international economicof many economic activities within each area. indicators (IEI) project (Klein & Moore, 1985)Also, within each of these areas, specialized started at the NBER in the early 1970s.coincident and leading indexes can be designed While growth cycles are not hard to identifyto anticipate the distinct cyclical movements. in a historical time series, they are difficult toWhile this framework has been fully fleshed out measure accurately on a real-time basis (Bos-for the US economy, with composite indexes for chan & Banerji, 1990). This is because the trendeach aspect and sector currently available, the over the last couple of years must be estimated,framework is still in the process of being fully and these trend estimates tend to be veryextended to the other major economies. unstable near the end (Cullity & Banerji, 1996).

The international extension of this framework This difficulty makes growth cycle analysis lesswith respect to economic activity is then pre- than ideal as a tool for monitoring and forecast-sented, and comparable business cycle and ing economic cycles in real time, even though itgrowth rate cycle reference dates for the US and still useful for the purpose of historical analysis.other major economies are defined. Comparable By the late 1980s, the use of growth ratesets of coincident and long leading indexes for cycles for the measurement of series, whicheach of these major market economies are also manifested few actual cyclical declines but didpresented. show cyclical slowdowns, was introduced

In sum, this paper shows how the classical (Layton & Moore, 1989). Like the step cycleindicator approach to forecasting can be refined introduced by Mintz (1969), the growth rateand applied in a consistent fashion to many cycle was based on the growth rate of economiceconomies within a multidimensional frame- activity. However, unlike the step cycle, it didwork, allowing for more in-depth analysis as not presume that the growth rate changed inwell as greater breadth of application. steps. The growth rate cycle was based on the

six month smoothed growth rate concept,which avoids the sort of extrapolation of thepast trend needed in growth cycle analysis. This2. Business cycles and growth rate cyclessmoothed growth rate is based on the ratio of

Leading indicators were originally designed the latest monthly figure to the average of theto anticipate traditional cyclical downturns and preceding twelve months. Cyclical turns in thisupturns in economic activity (i.e., recessions growth rate define the growth rate cycle

A. Banerji, L. Hiris / International Journal of Forecasting 17 (2001) 333 348 335

(Banerji, 1999). Turning points in the growth activity. During a cyclical upswing, the im-rate cycle could be identified by the same provement in economic activity spreads fromobjective procedures (Bry & Boschan, 1971) one firm to another, from one industry toused to identify business cycle turning points. another, from one region to another. Moreover,

The growth rate cycle not only avoids the these spreading movements snowball over time,problems of trend estimation presented by the as an expansion or contraction unfolds.growth cycle in the case of real-time moni- Another important characteristic of a cyclicaltoring, but also shares key cyclical characteris- upswing or downswing is its persistence. Atics exhibited by the business cycle. Most move in cyclical indicators that is pronouncedimportantly, the cyclical turns in the broad and pervasive, but lasts only 2 to 3 months,measures of aggregate economic activity in the does not qualify as a cyclical movement. Tech-form of output, income, employment, and sales nically, a cyclical upswing or downswing has tocluster together, whether viewed in the frame- persist at least 5 months (Bry & Boschan,work of business cycles or growth rate cycles. 1971), but most last much longer.Moreover, when growth rates are used, the Finally, cyclical changes tend to be pro-analysis still generates stable sequences of nounced in magnitude, compared with non-leading indicators that anticipate coincident cyclical fluctuations, or noise. In particular, theindicators. magnitude of the upswings or downswings must

What has emerged in recent years is the be comparable to those exhibited in previousrecognition that business cycles, growth cycles cyclical episodes.and growth rate cycles can all be monitored in a Of the three Ps, pervasiveness, or the co-complementary fashion. However, of the three, movement of many indicators, is necessarilybusiness cycles and growth rate cycles are more one that can be defined only with respect tosuitable for real-time monitoring and forecast- many series considered together. The other twoing, while growth cycles are more suitable for Ps can be considered, however, for individualhistorical analysis (Klein, 1998). time series, for which cyclical turns specific to

the series can be identified.2.1. Pronounced, pervasive and persistentswings in levels and growth rates 2.2. The clustering of cyclical turning points:

evidence of co-movementsThe identification of an economic fluctuation

as a cyclical movement is based essentially on The robustness of the classical approach tothe three Ps, i.e., whether the movements are cyclical analysis is based on the clustering ofpronounced, pervasive and persistent. The con- cyclical turns in the coincident indicators, ascept of the three Ps is not a new idea as it is well as the ability of leading indicators toinherent in the notion of the three Ds (duration, anticipate cyclical turns in the economy. Thedepth and diffusion), which are established objective identification of such cyclical turningcriteria for measuring the severity of a recession points is critical to cyclical analysis. Since(Fabricant, 1972). However, while the three Ds leading indicators are meant primarily to fore-apply only to cyclical downturns, the three Ps cast business cycle turning points, the identifica-apply to both upturns and downturns. tion of turning points in time series is a sine qua

A fundamental feature of a free market non for appropriate evaluation of forecastingeconomy is the cyclical diffusion or pervasive- performance. In order to identify cyclical upsw-ness of movement of indicators of economic ings and downswings, and the turning points


that demarcate them, an algorithm for the cyclical turns that the differences in the threeidentification of turning points, based on a aspects and various sectors of an economy cansystematic codification of the judgmental pro- be fully appreciated. One key reason for dis-cedures, is used. Such a procedure was devised tinguishing among cycles in aggregate econ-three decades ago (Bry & Boschan, 1971) omic activity, inflation and employment is thatshortly after the creation of the LEI, and was while cyclical turns cluster quite clearly withinused for decades at the NBER. each of these aspects, the resulting cycles are

The objective, though not mathematically different from each other. Similarly there issimple, definition of turning points given by Bry strong evidence of clustering of turns withinand Boschans algorithmic formulation of the services, manufacturing, and construction, andclassical NBER procedure makes it possible to the resultant cycles are quite distinct.evaluate the performance of indicators in termsof timing of cyclical turns. The computerizedBryBoschan algorithm was used extensively in 3. The multidimensional frameworkthe years following its creation (e.g., Klein &Moore, 1985). Other users of this algorithm The multidimensional framework for thehave included King & Plosser (1989), who analysis of economic cycles applies to both theprovide a description of the procedure. As levels of economic activity and their growthWatson (1994) has pointed out, the BryBos- rates. However, the latter are particularly rel-chan procedure provides a good way to define evant for the service sector and many interna-turning points since it is based on objective tional economies, which may exhibit relativelycriteria for determining cyclical peaks and rapid growth without absolute declines. Whiletroughs. the focus in the 1960s and 1970s remained on

The output from the BryBoschan program is cycles in economic activity or its growth rate,used as the basis for the determination of by the early 1980s it had become clear thatreference chronologies as well. In the NBER cyclical activity was not one-dimensional, andtradition, the turning points are determined for that there were cycles in other important aspectsall the major measures of aggregate economic of an economy that were worth monitoring,activity, with specific reference to output, in- specifically, inflation and employment.come, employment and sales. The turning points Of course, the LEI was used to predict cyclesare then clustered, i.e., the reference cycle in aggregate economic activity or economicturning point is chosen on the basis of the best growth. A key step forward in the evolution ofconsensus among the turning point dates for the multidimensional framework was the sepa-these individual indicators. The business cycle ration of leading indicators with long leads fromand growth rate cycle dates identified by such those with short leads (Cullity & Moore, 1990).an objective procedure are characterized by the The former may be combined into a longthree Ps pronounced, pervasive, and persistent leading index, and the latter into a short leadingmovements in the cyclical indicators between index, while coincident indicators are combinedturning points. into a coincident index. Such a set of long

This clustering of turning points reflects the leading, short leading and coincident indexescyclical co-movement of many economic ac- results in a sequential system for monitoringtivities that is the hallmark of an economic cyclical developments.cycle. It is in the context of such clustering of Because inflation exhibits cycles distinct from


economic activity, a composite leading index tightness in employment, financial, or domesticmay be constructed specifically to lead inflation or foreign goods markets, and thus measurecycles. Since employment cycles differ from underlying inflationary pressures. Such in-business cycles as well, just as inflation cycles flation-specific leading indicators can be com-do, a composite leading index may also be bined into a Future Inflation Gauge (FIG).constructed specifically to predict employment Similar composite leading inflation indexescycles. Independent corroboration of the validity have also been developed by other researchersof such a multidimensional cyclical structure in (Niemira & Klein, 1994). Other researchersthe economy comes from Stock and Watson have also focused on the inflation cycle, as(1998), who conducted a large-scale factor distinct from the business cycle (Roth, 1986;analysis of a large number of US time series. Ivanova et al., 2000).They found that according to the factor load- The distinction between cycles in economicings, the first factor related to measures of growth and inflation once again came to the foreeconomic activity and in particular measures of in the late 1990s, when the US economyoutput similar to industrial production. The experienced several years of non-inflationarysecond (and orthogonal) factor had strong factor growth. During this period, the FIG accuratelyloadings on money, earnings, and prices, which predicted subdued inflation, even as the leadingare of course linked directly to inflation. The indicators of economic growth correctly forecastthird factor had heavy factor loadings on vari- a robust economy. In this case, overall inflation-ables related to employment. This suggests that ary pressures, as measured by the FIG, werethe proposed multidimensional cyclical frame- kept in check by imported disinflationarywork covers the three most important distinct pressures, even as joblessness fell and domesticdimensions of the US economy. inflation pressures climbed.

The framework was further extended with the In general, while it is true that cyclicalrecognition that the economic activity aspect of downturns in inflation follow growth slow-the economy can be divided into foreign trade downs about 70 percent of the time, growthand domestic activity. The latter can be sub- slowdowns actually follow inflation downturnsdivided into three major sectors services, the other 30 percent of the time. In other words,manufacturing, and construction. economic growth or the unemployment rate

alone can be imprecise predictors of the timingof cyclical turns in the inflation cycle. Hence the3.1. Inflation and employmentneed for leading indicators of inflation distinct

In the aftermath of the stagflation of the late from leading indicators of economic activity.1970s, it was quite obvious that there could be Another important aspect of the economy isimportant divergences between cyclical be- employment. In the early 1980s, Moore and hishavior in economic growth, in inflation, as well colleagues developed a specialized leadingas in employment. While these variables are index to anticipate changes in employmentloosely related, it became increasingly clear that conditions (Moore, 1981). The Coincident Em-they could exhibit very different cyclical timing. ployment Index is designed to move in step

These developments gave a fresh impetus to with the cyclical movement in employmentthe development of an index of leading in- conditions, while the Leading Employmentdicators of inflation (Moore & Kaish, 1983). Index is designed to anticipate these employ-These indicators typically reflect the degree of ment cycles. In early 1990, the Leading Em-


ployment Index forecast a sharp and recession- act in concert, and quicker employment growthary rise in the jobless rate, and was the key to is accompanied by faster price rises in com-

1Geoffrey Moores prediction of a recession modity prices, rapid expansion of credit and(Sebastian, 1990) that newer econometric meth- increasing delays in supply lines. The pervasive

2 influence of all these factors usually leads to anods failed to predict. The recession did start ininflation upswing.July 1990, but the governments LEI did not

3 However, at certain times the link betweenpredict the recession either (Wessel, 1990)employment growth and some of these otheruntil much later in the year.indicators may be broken. This may happen, forAlthough strong employment growth can be ainstance, because of central bank action orsource of inflationary pressure, it is by no meansbecause of adverse cyclical developments inthe only factor that determines future inflation.other countries. In these cases, the inflationaryThere are many other factors, such as growth ininfluence of high employment would be morethe prices of industrial materials and imports,than counteracted by other disinflationary orcredit growth and tightness in supply lines.even deflationary influences, resulting in lowMuch of the time, the influences of these factorsinflation in spite of tight labor markets.

1The importance of the employment indicators to Moores The link between cyclical swings in employ-prediction is evident from the description in Sebastian ment growth and inflation during the postwar(1990), from The Wall Street Journal dated March 9: era has broken down several times. During theGeoffrey Moore, who at 75 years of age has had a hand

stagflation of the late 1970s, employment de-in declaring many modern recessions, gives his opinionclined in 1976 and again in 1978, while inflationeven without being asked. Mr. Moore, director of Colum-

bia Universitys Center for International Business Cycle continued to climb. Also, there were severalResearch, recently noted the centers employment index episodes when employment grew strongly with-has begun signaling recession . . . Newly pessimistic, Mr. out causing inflation. Out of 13 upswings inMoore puts the odds of a recession at two-to-one in the

employment during the postwar period, 10 werefirst half. If we escape recession in the first half, Idfollowed by an inflation upswing within a yearchange the odds to fiftyfifty in the second half. Mr.or so. In two cases, the inflation upswing startedMoore admits that the centers long-leading index its

main predictor is still very strong. I had some difficulty even before the upswing in employment growthreconciling that. Maybe it means a recession will be very began. However, in three cases, in 1980, inbrief if it comes. 1991, and most recently in 1996, a sustained2In the same article, Sebastian (1990) wrote: The just-

upswing in employment was accompanied by areleased January reading on the NBERs new recessionsustained inflation downturn. The evidence isindex puts the chance of recession at a measly 3% in the

next 6 months . . . Our new index would be consistent clear, therefore, that employment cycles andwith the fourth quarter of 1989 being the worst of quarters inflation cycles are quite distinct from eachin this cycle, says James Stock, . . . one of the new other. For that reason, in the case of inflation asindexs creators.

well as the case of employment, the notion was3Wessel (1990), writing in The Wall Street Journal datedthat, by combining indicators pertaining to aDecember 3, noted, The governments economic forecast-single critical macro-economic dimension ofing gauge is finally flashing the recession sign, but the

warning comes after what most economists say was the economic performance, results would be morebeginning of the downturn . . . A rule of thumb developed precise and, hopefully, produce longer and moreby University of Michigan forecaster Saul Hymans is that reliable leads for forecasting (Klein, 1993).three consecutive declines in the index signal a recession. It is interesting to note that US FederalThe index dropped in August and September, but it wasnt

Reserve policy during the Greenspan years hasuntil Friday that the Commerce Department revised thefigures for July to show a decline for that month, too. been remarkably well correlated with cycles in


the FIG (Banerji & Klein, 2000). According to parts, representing the major sectors of theCoons (2000), the FIG, which is a measure of economy.inflationary pressures, has reliably predictedchanges in the direction of the federal funds rate 3.2.1. Foreign tradetarget at least since Greenspan was named Fed The traditional leading indicator approachChairman in 1987. Coons further observes that

evolved mainly in the context of closedno indicator or forecasting method is without

economies. Yet, with the increasing globaliza-its flaws, but this combination (the FIG) seemstion of the economy, it has become more

to distill from the relevant information available important to be able to anticipate the cycles inat any time what is knowable about the future foreign trade that can significantly impact thedirection of interest rates. domestic economy.Thus, the leading indexes of employment and The economic growth aspect of the economyinflation have chalked up impressive achieve-

can be split up into two major divisions, onements in the past decade. Five months before

relating to the domestic economy, and the otherthe 199091 US recession began, the employ-

to foreign trade. In order to monitor trade flows,ment index predicted a sharp increase in un-

the Leading Exports Index (LExI), based onemployment consistent with a recession, which

exchange rates and the long leading indexes forbetter-known forecasting tools were unable to US trading partners, was developed so that the4foresee. The inflation indicators, on the other LExIs growth rate could anticipate cycles inhand, accurately anticipated every directional US exports growth. Similarly, the growth rate ofchange in a successful Federal Reserve policy

the Leading Imports Index anticipates cycles induring a period when many observers invoked a US imports growth, and the Leading Tradenew paradigm to explain the apparent delink- Balance Index anticipates cycles in the US tradeing of US growth and inflation. balance (Hiris & Guha, 2001).3.2. Economic activity and growth

3.2.2. Major sectors of the domestic economyComposite indexes of leading, coincident, Traditional leading indexes are designed to

and lagging indicators have long been con- anticipate cycles in overall domestic economicstructed for the purpose of monitoring cycles in activity. However, the major sectors of theeconomic activity and growth. However, econ- domestic economy do not always move in theomic activity, one of the three aspects of the same direction, and it can be of value toeconomy, can be broken down into several subdivide the domestic economy into its three

sectors manufacturing, services and construc-tion corresponding to the broad division of4In February 2001, the Leading Employment Index growth gross domestic product into goods, services and

rate plunged to a 19-year low, pointing to a recessionarystructures.increase in unemployment in 2001. Along with recession-

The manufacturing sector is known to beary declines in most of the other U.S. leading indexes, thisresulted in ECRIs prediction of a recession in 2001. As of highly cyclical, exhibiting its own expansionsJune 2001, most of the key coincident indicators used by and contractions in economic activity. Cycles inthe NBER to define U.S. recessions, such as industrial the manufacturing sector are tracked by theproduction and employment, had declined in a way they Coincident Manufacturing Index, which is madehad done only during earlier recessions. However, con-

up of coincident indicators of manufacturingcensus forecasts suggested that the economy would averta recession. activity. The Leading Manufacturing Index,


made up of leading indicators specific to manu- inflation and employment, exhibit distinctfacturing activity, anticipates these cycles. characteristics. Specifically, they each exhibit

In recent decades, the service sector has pronounced, pervasive, and persistent move-become the increasingly dominant part of the ments in terms of levels, growth rates, or both.US economy, accounting for more than half ofoutput and four-fifths of employment. Although 3.2.3. Evidence of cyclical behavior: stablethe service sector does not typically exhibit the sequences of leadsfamiliar cycles of expansion and contraction, it Leading indicators, whose cyclical turns con-does show cyclical speedups and slowdowns in sistently anticipate cycles in the coincidentgrowth. The application of the concept of indicators, provide further evidence supportinggrowth rate cycles to analyze the service sector the existence of stable patterns of cyclicalof the economy is, therefore, appropriate movements. This is true whether the indicators(Layton & Moore, 1989). The growth rate of are viewed in terms of levels or growth rates,the Coincident Services Index, made up of and whether it is overall economic growth orcoincident indicators of services activity, aspects or sectors of the economy that aremonitors the current state of the service sectors examined. At the Economic Cycle Researchgrowth rate cycle, while the growth rate of the Institute (ECRI), founded by Geoffrey H.Leading Services Index anticipates those cycles. Moore, composite leading and coincident index-

The third slice of the domestic economy is es were created for all of these aspects andthe highly cyclical construction sector. The sectors of the US economy.Coincident Construction Index and Leading As Table 1 shows, the ECRI leading indexesConstruction Index track these cycles in an for each aspect of the US economy as well asanalogous fashion. for each major sector consistently lead the

Each of these sectors of the domestic corresponding coincident indicators at cyclicaleconomy, as well as foreign trade, along with turning points (by convention, leads have nega-the two other key aspects of the economy, i.e., tive signs and lags have positive signs). On

Table 1aUnited States, 10 leading indexes timing at cyclical peaks and troughs

Index Number of Number of Leading indexescyclical cyclical average leads (months) attroughs peaks

Troughs Peaks Overall

Long leading 9 9 2 6 2 11 2 8Short leading 9 9 2 2 2 10 2 6Leading employment 9 8 2 3 2 10 2 6Leading manufacturing 9 9 2 3 2 7 2 5

bLeading services Leading construction 9 8 2 4 2 5 2 5Leading trade balance 4 5 2 14 2 13 2 13

bLeading imports bLeading exports

Future inflation gauge 12 11 2 12 2 11 2 12a Source: Economic Cycle Research Institute, New York City.b These indexes do not show clearly cycles in terms of levels, but do exhibit growth rate cycles (see Table 2).


average, the Long Leading and Short Leading a cyclical turn is usually obtained from a longindexes lead business cycle turning points by leading index (Cullity & Moore, 1990). In thisnearly a year at peaks and half a year or less at regard, they are superior to traditional leadingtroughs. A similar asymmetry of leads is seen in indexes. In practice, because of the normal datathe performance of the Leading Employment publication lags and the inevitable delay inIndex. The Leading Manufacturing and Con- recognizing a turning point after it occurs, thestruction Indexes have average leads of about effective leads of most traditional leading index-half a year. The Future Inflation Gauge and es are often whittled down to virtually zero.Leading Trade Balance Index have leads that Because of their longer lead times, long leadingare roughly symmetric at peaks and troughs, and indexes are less susceptible to this problem, andclose to a year. are therefore more useful to policy makers and

As Table 2 shows, the leading character of others who need to take early action before athese indexes is retained when they are ex- cyclical turn. Such long leading indexes are nowamined in terms of growth rates. However, the available for over a dozen countries other thanleads are now generally shorter and more the United States.symmetric. In fact, all the above-mentionedindexes lead by about half a year, on average, atboth peaks and troughs. The growth rates of the 4. The multidimensional framework in anLeading Services Index and the leading indexes international contextof exports and imports, which do not exhibitcycles in level terms (Table 1), do show clear Wesley Mitchell long ago recognized thecycles in growth rate terms, and lead by about need for the study of business cycles in thehalf a year at both peaks and troughs. international context. More than seventy years

It should be noted that the earliest warning of ago, he wrote, For theoretical uses, there is

Table 2aUnited States, 10 leading indexes timing at growth rate cycle peaks and troughs

Index Number of Number of Average leads (months) atgrowth rate cycles growth rate cycles

Troughs Peaks Overalltroughs peaks

Long leading 13 14 2 7 2 7 2 7Short leading 14 14 2 6 2 3 2 4Leading employment 14 15 2 6 2 6 2 6Leading manufacturing 13 14 2 5 2 6 2 5

bLeading services 12 12 2 6 2 6 2 6Leading construction 14 13 2 5 2 8 2 6

bLeading trade balance Leading imports 12 13 2 7 2 8 2 7Leading exports 5 5 2 6 2 6 2 6

cFuture inflation gauge a Source: Economic Cycle Research Institute, New York City.b Since the trade balance can be both positive and negative, growth rates of this measure are not appropriate.c The level of the future inflation gauge is already designed to anticipate cycles in the rate of inflation (see Table 1), i.e.,

the growth rate of CPI.


needed a systematic record of cyclical alterna- focus on data from a single country and ations of prosperity and depression, covering all limited time period. Unfortunately, businesscountries in which the phenomena have ap- cycles follow many different patterns, and cy-peared, and designed to make clear the recurrent cles may arise out of the combined contributionfeatures of the fluctuations (Mitchell, 1927). of a number of economic processes. The contri-Three quarters of a century later, Basu and butions of different economic processes changeTaylor confirmed, a robust and useful theory of from turning point to turning point. Also, it isbusiness cycles should be able to account for impossible to predict which of these cyclicalthe pattern seen in the long-run data for many processes will trigger the next turn. Thus,countries (Basu and Taylor, 1999). single-country data, especially over a period of

Some of the most important substantive ad- one or two decades (perhaps three or fourvances in measuring business cycles have been cycles), is simply not enough to permit thein the extension of the classical indicator analy- coverage of the diversity of these processes.sis approach to a number of economies. More What is preferable to such single-countryspecifically, a major achievement has been the data, but not always available to most research-finding that many of the same indicators lead ers, is the data on cycles in a large variety ofeconomic cycles in a diverse collection of free-market economies. While the structuraleconomies with different structures. This en- differences can obviously be an issue, theables the design of robust systems of indicators, commonalities can be very revealing in guidingwhich can work in a variety of economies and the choice of a robust set of leading indicators.in the same economy through major structuralchanges. 4.1. Comparable cyclical indicators across

Leading and coincident indexes, similar to bordersthose developed for the United States, wereinitially constructed for other major market The classical approach represented by Mooreeconomies by Klein and Moore (1985). A and his colleagues has never been to start with afurther important enhancement of these efforts large list of potential leading indicators, andongoing at ECRI is the development of a system choose from them just on the basis of the bestof cyclical indicators which are comparable statistical fit to a limited amount of single-across borders. Moore and his associates fol- country data. The guiding principle has alwayslowed a rather strict procedure in that they been conceptual in that the list of indicators thatassembled data from the other countries on the are to constitute a leading index must contain asame types of economic processes that have representative sample of all the key processesproved to be leading indicators in the US. In a that are known to contribute to the economicsense, each country for which these systems of cycles being targeted. These have been based onindicators were constructed served as an out-of- the detailed cyclical analysis of many freesample test for the selected set of leading market economies. The choice of leading in-indicators. Such a procedure does not necessari- dicators is then made from all the available timely identify the best leading indicators for each series that reflect the key processes mentioned,country over a given time span. What it does primarily on the basis of their performance atyield, however, is a robust set of leading cyclical turning points. Despite the relativeindicators. brevity of the time series, the approach of using

There is the tendency for virtually all roughly equivalent indicators across countries,economists who work on leading indicators to instead of choosing the indicators according to


Table 3aTiming at business cycle peaks and troughs, long leading indexes, 13 countries

Country Number of Number of Long leading indexesbusiness cycle business cycles average leads (months) attroughs peaks


US 9 9 2 6 2 11 2 8Canada 2 2 2 14 2 12 2 13Germany 4 4 2 10 2 10 2 10France 4 4 2 2 2 9 2 6UK 3 3 2 13 2 20 2 17Italy 3 2 2 11 2 12 2 11Switzerland 4 4 2 15 2 13 2 14Sweden 4 3 2 7 2 10 2 9Japan 2 3 2 12 2 10 2 11Korea 2 2 2 7 2 1 2 4Australia 6 5 2 7 2 15 2 11Taiwan 1 1 2 12 2 10 2 11N.Z. 6 6 2 5 2 4 2 4

a Source: Economic Cycle Research Institute, New York City.

the degree of statistical fit, has led to success in has worked successfully in the vast majority ofdeveloping economic indexes for countries as these countries as it has in the US.diverse as China, Jordan and India. While new The full multidimensional framework de-countries are being added to the list on an veloped for the US economy can be successful-ongoing basis, it is very important to note that ly applied, in principle, for other marketso far, the selected group of leading indicators economies as well. This effort is already under-

Table 4aTiming at growth rate cycle peaks and troughs, long leading indexes, 13 countries

Country Number of Number of Long leading indexesgrowth rate cycle growth rate cycles average leads (months) attroughs peaks


US 13 14 2 7 2 7 2 7Canada 9 10 2 6 2 5 2 5Germany 8 7 2 12 2 10 2 11France 9 8 2 4 2 7 2 6UK 8 8 2 5 2 11 2 8Italy 4 3 2 13 2 13 2 13Switzerland 6 7 2 12 2 8 2 10Sweden 6 6 2 4 2 9 2 6Japan 11 11 2 7 2 8 2 7Korea 6 6 2 9 2 8 2 8Australia 13 13 2 7 2 6 2 6Taiwan 9 9 2 6 2 5 2 5N.Z. 7 6 2 6 2 5 2 6

a Source: Economic Cycle Research Institute, New York City.

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a During the period for which data are available (1984present), the Chinese economy experienced no business cycle recessions. Source: for the United States, National Bureauof Economic Research (NBER). For other countries, Economic Cycle Research Institute, New York City. Note: Shaded cells represent periods for which data are not available.

Table 5aBusiness cycle peak and trough dates, 18 countries, 194898

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333348

345a Source: Economic Cycle Research Institute, New York City. Note: Shaded cells represent periods for which data are not available.

Table 6aGrowth rate cycle peak and trough dates, 18 countries, 19492000


way. In fact, like the US economy, at least a What is remarkable about the consistent leadsdozen other market economies exhibit pro- shown in Tables 3 and 4 is that virtually thenounced, pervasive and persistent movements in same indicators are used for the long leadingboth the levels and growth rates of aggregate indexes for every country, showing how robusteconomic activity, which are characteristic of these cyclical patterns remain in spite of thebusiness and growth rate cycles. structural differences among the different

As Table 3 shows, the long leading indexes economies. The robustness of these leads alsofor each of these countries show clear leads at suggests that these same long leading indexespeaks and troughs of the business cycle. As can be used as reliable leading indicators ofTable 4 shows, the growth rates of these long economic cycles. It follows, therefore, that theseleading indexes also consistently lead the peaks long leading indexes are likely to remain reli-and troughs of their respective growth rate able even after the economy being monitoredcycles, by about half a year to a year on undergoes significant structural changes.average.

4.2. Reference chronologies 5. ConclusionsIt is important to understand the vital impor- It has been shown that economic cycles can

tance of a proper set of reference dates for take the form of business cycles or growth rateinternational business cycles and growth rate cycles. It is important to note that in both casescycles. Those reference chronologies really they are characterized by the pronounced,define the cycles that we seek to compare and pervasive and persistent movements of cyclicalcontrast across the countries, so it is critical that coincident indicators. Such movements are thethey should be selected on the basis of a hallmark of cyclical patterns seen in a wideuniform set of procedures based squarely on the range of market economies, as well as in criticalNBER approach long used in the US. The aspects of the US economy, and sectors of theend-result of these efforts is displayed in Tables US economy. In all of these cases, it is also55 and 6. These reference chronologies can now possible to design composite leading indexes toserve as benchmarks for use by other research- anticipate these cyclical turning points ers who seek to perform cross-country com- another characteristic of cyclical processes.parisons of cyclical patterns. The same set of indicators used to create the

The business cycle peaks and troughs for US Long Leading Index can be used to putcountries other than the United States were together long-leading indexes for a variety ofchosen by applying the same NBER-type clus- market economies. Not only do these economiestering approach, and these reference cycle dates exhibit business cycles and growth rate cycles,are shown in Table 5. The reference cycle dates but these cycles are consistently anticipated byfor the growth rate cycles for the same countries cycles in the long leading indexes for all thosewere also chosen using analogous procedures, countries.and are shown in Table 6. Both sets of reference Thus, what the research has shown is thecycle dates were determined by the Economic durability of the phenomena known as businessCycle Research Institute under the guidance of cycles and growth rate cycles, and the robust-Geoffrey Moore. ness of the long leading indexes that anticipate5 these cycles in countries that have differingThe latest updates to these reference chronologies areavailable at www.businesscycle.com. economic structures.


The success of the multidimensional frame- associate editor of this journal, for meaningfulwork for the US strongly suggests the same and insightful comments.approach should be fully extended to othercountries. In addition to the coincident and long

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