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Current Period Performance of OECD Composite Leading Indicators

By Ronny Nilsson and Emmanuelle Guidetti

Abstract

This paper presents a comprehensive analysis of the current period performance of the OECD composite leading indicators (CLIs) for 21 OECD Member countries and three zone aggregates for which CLIs are available for a longer time period. The main aim of the current analysis on CLIs is to further evaluate the quality of the indicator in order to identify areas where their reliability could be improved. The results show that first estimates of CLIs are revised frequently but the size of revisions is rather small for most countries and almost neglectable for zone aggregates and there is no evidence of bias. The OECD CLI is, however, designed to provide early signals of turning points (peaks and troughs) between expansions and slowdowns of economic activity. Forecasting turning points is one of the main objectives of the leading indicator technique, because predicting the timing of cyclical turning points is one of the least reliable activities in economic forecasting. The results provide evidence that first and second estimates of year-on-year growth rates give reliable signals of approaching cyclical turning points. Finally, the importance of smoothness of components in the calculation of first and second estimates of the CLI and the overall smoothness of the CLI itself is noted in the findings. The results support the argument that it is not enough to have timely components they also need to be smooth to guarantee small revisions. Overall, this study has shown that whilst it could be dangerous to draw conclusions on the directions up or down in growth rates from one or two months figures for several countries, the first and second estimates of the CLIs give early signals of approaching turning points which in most cases are not revised later.Revision analysis, Leading indicators, Turning points, Smoothness

DOI identifier: 10.1787/jbcma-2007-5km7vgqh718t
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