The timing and accuracy of leading and lagging business cycle indicators: A new approach

Leading and trailing indexes are characterized by their timing and their accuracy. Timing is the lead or lagging (trailing) time relative to a target time series, here industrial production (IP). Accuracy is measured here by the correspondence between the directions of changes in the indicator and the target. By plotting candidate leading and trailing time series and the target time series in phase plots and using the rotational properties of such trajectories, we found that the NBER composite leading index had lead times similar to those previously reported. From a topological map of composite as well as single leading and lagging indexes, some indexes showed unexpected properties. The interest rate spread showed a trailing pattern. The composite indicators, as well as average working hours per week and the consumer price index, behaved as expected. The method helps characterize leading and trailing indicators. With each new index that is paired with IP, one can immediately assess whether the index behaves as anticipated (leading, coinciding or trailing) with respect to IP.