The Leading Economic Indicators and Business Cycles in the United States : 100 Years of Empirical Evidence and the Opportunities for the Future

In a time of unprecedented economic uncertainty, this book provides empirical guidance to the economy and what to expect in the near and distant future. Beginning with a historic look at major contributions to economic indicators and business cycles starting with Wesley Clair Mitchell (1913) to Burns and Mitchell (1946), to Moore (1961) and Zarnowitz (1992), this book explores time series forecasting and economic cycles, which are currently maintained and enhanced by The Conference Board. Given their highly statistically significant relationship with GDP and the unemployment rate, these relationships are particularly useful for practitioners to help predict business cycles. Preface 6 Contents 10 About the Author 16 List of Figures 18 List of Tables 21 1 Economic Growth and Business Cycles in the U.S 23 1.1 Depression in the Late Nineteenth-Century U.S. Economy 26 1.1.1 The Panic of 1873 28 1.1.2 The Cycle of 1879–1885 29 1.1.3 The Cycle of 1885–1888 30 1.1.4 The Panic of 1893 and the Cycle of 1894–1897 31 1.1.5 Monetary Policy and Prices, 1890–1909 32 1.2 Mr. Fisher and the Purchasing Power of Money and Depressions 34 1.3 Post-War Economic History and Measuring U.S. Economic Growth 37 1.4 Our Path Ahead 41 2 Wesley Clair Mitchell: The Advent of U.S. And NBER Business Cycle Research 44 2.1 Mitchell’s Early Business Cycles Analysis: What Investors Needs to Know About the Cumulation of Prosperity 45 2.1.1 Mitchell’s Early Business Cycles Analysis: Prosperity Breeding Crisis 47 2.1.2 Mitchell’s Early Business Cycles Analysis: Crisis 49 2.1.3 Mitchell’s Early Business Cycles Analysis: Business Depression 52 2.1.4 Mitchell’s Early Business Cycles Analysis: Wider Aspects of Business Cycles 55 2.2 Mr. Mitchell and His Business Cycles and Unemployment 57 2.3 Mitchell’s Business Cycles Analysis at the NBER: Volume 1 60 2.4 Summary and Conclusions of Mr. Mitchell and His Business Cycles and His Business Cycles 69 3 Measuring Business Activity: An Introductions to the Contributions of Mr. Persons, Mr. Schumpeter, Mr. Haberler, and Mr. Eckstein 70 3.1 Mr. Persons and the General Business Conditions Index 71 3.2 Mr. Schumpeter and His Business Cycles 79 3.3 Mr. Haberler and Prosperity and Depression 84 3.3.1 Mr. Haberler and the Prosperity and Depression Phases 86 3.3.2 Mr. Haberler and His the Expansion and Contraction Phases 88 3.3.3 Mr. Haberler on Crisis and Revival 90 3.4 Econometric Modelling and Mr. Eckstein and His DRI Model 92 3.4.1 Mr. Eckstein: The DRI Model and the Business Cycle 95 3.5 Summary and Conclusions to the Contributions of Mr. Persons, Schumpeter, Haberler, and Eckstein 98 4 Mr. Burns and Mr. Mitchell on Measuring Business Cycles 100 4.1 Comments on Measuring Business Cycles 109 4.2 Mr. Burns on Mr. Mitchell and the Progress on Business Cycle Research 113 4.3 Summary and Conclusions of the Mr. Burns and Mr. Mitchell Business Cycle Research 120 References 120 5 Mr. Geoffrey Moore and NBER Business Cycle Research 122 5.1 Mr. Moore and his Business Cycles Indicators (1961) 123 5.2 Mr. Moore and his Business Cycles, Inflation, and Forecasting (1983) 130 5.3 What is a Recession? 130 5.3.1 Mr. Moore and His Leading Group Indicators 132 5.3.2 Unemployment 134 5.3.3 The Money Supply and Stock Prices 134 5.4 Mr. Moore and the Mildness and Shortness of Postwar Recessions 137 5.5 Mr. Moore and his Leading Indicators for the 1990s 139 5.6 Mr. Moore and Mr. Lahiri and Their Leading Economic Indicators (1991) 141 5.7 Mr. Zarnowitz and his Tribute to Mr. Moore: The Ms. Dua Volume 142 5.8 Summary and Conclusions 145 6 Mr. Victor Zarnowitz and Economic Forecasting, and NBER Business Cycle Research 146 6.1 Forecast Rationality 148 6.2 Absolute and Relative Forecast Accuracy 153 6.3 Extending the Mincer-Zarnowitz Forecasting Benchmark 155 6.4 Mr. Zarnowitz, the NBER, and Business Cycle Research in 1992 159 6.4.1 Mr. Zarnowitz and the Lists of Leading Indicators, 1950–1989 163 6.4.2 Econometric Model Simulations and Business Cycles 164 6.5 Mr. Zarnowitz and The Major Market Economies during the Post-World War II Period 167 6.5.1 Estimated Dimensions of Business Cycles in Eight Countries 168 6.5.2 Growth Cycles 171 6.5.3 Mr. Zarnowitz and Exogenous Business Cycle Variables: Money 173 6.5.4 Mr. Zarnowitz, Business Cycles and Expectational Shocks 174 6.5.5 What is a Business Cycle: Some General Conclusions 176 6.6 Summary and Conclusions 177 Appendix 6.1: Exponential Smoothing 177 References 181 7 Regression and Time Series Modeling of Real GDP, the Unemployment Rate, and the Impact of Leading Economic Indicators on Forecasting Accuracy 184 7.1 Estimating an Ordinary Least Square Regression Line 186 7.2 Estimating Multiple Regression Lines 190 7.3 Influential Observations and Possible Outliers and the Application of Robust Regression 192 7.4 Estimating Simple and Multiple Regression Models in SAS 194 7.4.1 Estimating OLS and Robust Regression Real GDP Models in SAS 196 7.4.2 Estimating OLS and Robust Regression Models of the Unemployment Rate in SAS 212 7.4.2.1 Estimation Six: The Unemployment Rate and WkUNCL OLS Model, 1959–2018 223 7.5 Estimating Robust Regression Simple and Multiple Regression Model in SAS 251 7.6 Estimating Automatic Time Series Models and Forecasting 262 7.6.1 Automatic Time Series Model Selection Using OxMetrics 263 7.6.2 Automatic Time Series Modeling of Real GDP Using Leading Economic Indicators (LEI), 1959–2020 266 7.7 Automatic Time Series Modeling of the Unemployment Rate Using Leading Economic Indicators (LEI) 271 7.8 Forecasting the Unemployment Series with Leading Indicators and Adaptive Learning 286 7.9 Concluding Remarks and Extensions 289 Appendix: OxMetrics Modeling in the COVID Period 289 BOLD Notes the Statistically Significant AR1 and LEI Coefficients and the WkUNCL Component Variables 295 BOLD Denotes Statistically Significant Coefficients on the AR1 and LEI and Its WkUNCL Components 300 References 307 8 Granger Causality Testing and LEI Forecasting of Quarterly Mergers and the Unemployment Rate 311 8.1 Causal Analysis for Economic Policy 312 8.2 Regression Modeling of Quarterly Mergers, Stock Prices, and the LEI 313 8.3 Time Series Model Selection and Granger Causality Modeling 318 8.4 Granger Causality Testing in the SCA System 320 8.5 Rolling Forecast Windows Modeling Efficiency 329 8.5.1 Rolling Windows and Real GDP with the LEI and Money Supply 336 8.6 Summary and Conclusions 344 References 346 9 Active Management in Portfolio Selection and Management Within Business Cycles and Present-Day COVID 350 9.1 The Risk-Return Trade-Off Work of Markowitz, Sharpe, and Elton and Gruber 351 9.1.1 Markowitz Optimization Analysis 356 9.1.1.1 A General Form of Portfolio Optimization 358 9.1.2 Multi-Beta Risk Control Models 363 9.1.3 The BARRA Model: The Primary Institutional Risk Model 368 9.2 Implementing Optimal Portfolio Selection 374 9.2.1 What We Knew in 1991 Tests of Fundamental Data 374 9.2.2 What We Learned After 1993 382 9.2.3 Markowitz Risk Modeling with Barra and Axioma Risk Models: Constructing Mean-Variance Efficient Frontiers 387 9.2.4 The Stone Mathematical Assignment Program Trade-off Curve 390 9.3 The Existence and Continued Persistence of Financial Anomalies, 2003–2108 391 9.3.1 Portfolio Selection Through Much of COVID 405 9.4 Summary and Conclusions 425 References 425 10 Testing and Forecasting the Unemployment Rate with the Most Current Data, TCB LEI, Data as of 11/05/2021 433 10.1 OLS Modeling of the PJD Unemployment Rate, TCB LEI 11052021 in 1959–11/2021 434 10.2 Robust Regression of the Modeling the PJD Unemployment Rate, TCB LEI 11052021 496 10.3 Robust Regression Estimations of the DUE, DLLEIL1, and DkWkUNCLL1 Relationships Using M, S, and MM-Estimations 521 10.4 OLS Modeling of the PJD Unemployment Rate, TCB LEI 11052021 in 1999–11/2021 536 10.5 Robust Regression of the Modeling the PJD Unemployment Rate, TCB LEI 11052021, 1999–11/2021 550 10.6 Automatic Time Series Modeling and Forecasting the PJD Unemployment Rate, the Application of OxMetrics to TCB LEI 11052021 561 10.7 Automatic Time Series Modeling and Forecasting the PJD Unemployment Rate, the Application of OxMetrics to TCB LEI 11052021 to the MZTT Post-publication Period, 1999–11/2021 587 10.8 Concluding Remarks and Extensions 596 References 597 11 Conclusions and Summary 599 11.1 Where Do We Go from Here? 608 Appendix: The Theory and Estimation of Regression, Time Series Analysis, and Causality Modeling of the Unemployment Rate and the Leading Economic Indicators (LEI) 609 Estimating an Ordinary Least Square Regression Line 610 Estimating Multiple Regression Lines 615 Influential Observations and Possible Outliers and the Application of Robust Regression 617 Time Series Modeling and the Forecasting Effectiveness of Transfer Functions 620 Basic Statistical Properties of Economic Series 621 The Autoregressive and Moving Average Processes 625 ARMA Model Identification in Practice 630 Forecasting Effectiveness of Time Series Modelling Using AutoMetrics to Estimate Breaks with Saturation Variables 633 Granger-Causality Modeling and Testing 645 Influential Observations and Outlier Detection 647 The U.S. Leading Economic Indicators 649 Identifying Influential Observations in a Regression 651 Selected References 656 Index 659