In December 1995, The Conference Board became the official source for the widely-publicized composite indexes of leading, lagging, and coincident indicators. For almost 30 years, these economic data series-often referred to as "the leading index" or "the leading indicators"-were compiled and published by the U.S. Department of Commerce. The Conference Board has also assumed responsibility for compiling a larger set of economic indicators that was also previously provided by the federal government in both a conventional publication, the Survey of Current Business, and in electronic format (both diskettes and on the Internet). The Board publishes this under the title Business Cycle Indicators.
General Overview of the Composite Indexes and How They are Commonly Used
The composite leading, coincident, and lagging indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. Because they are averages, they tend to smooth out a good part of the volatility of the individual series and thereby serve as handy summary measures of the business cycle. Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, while the cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity. The cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity. A change in direction in a composite index does not signal a cyclical turning point unless the movement is of significant size, duration, and scope. It is important to recognize that the timing of the leading index has been irregular and "false signals" are inevitable. The main value of the leading index is in signaling that either the risk of a recession has increased or that a recession may be coming to an end.
Although it is often stated in the press that three consecutive downward movements in the leading index signal a recession, we do not endorse the use of such a simple, inflexible rule. The October 2006 issue of Business Cycle Indicators discusses how about a 2.5 percent (about 4.5 to 5.0 percent when annualized) decline in the leading index, coupled with declines in a majority of the 10 components, provides a more reliable, but not perfect, recession signal.
Details on the Procedure for Constructing the Composite Indexes
The methodology closely follows the procedures the BEA had previously used (as described in "Business Cycle Indicators: Upcoming Revision of the Composite Indexes" in the October 1993 issue of the U.S. Department of Commerce's Survey of Current Business). The Conference Board has implemented revisions to the methodology in 2001 and 2005. More information about these changes can be found in the Methodology and Revisions section.