This is a research report that predicts economic growth or contraction for each time period from July 2008 - July 2019, using a probit model.
Abstract
The Composite Leading Index (CLI) is an index composed of various indicators that are thought to have predictive value for the US economy. The purpose of this report is to see if the CLI can predict the direction of economic growth in the upcoming 3 quarters. In particular, one of the purposes of this research is to explore if these predictions can be made accurately for the 2008 recession and current post-2008 recession business cycle. Data from 1983 to April 2008 are used to estimate the model, and data from July 2008 to July 2019 are used to evaluate the model. Probit models of all 3 lags of the CLI, of lags 2 and 3 of the CLI, of lags 1 and 2 of the CLI, and of lags 1,2, and 3 individually are tested for significance in predicting the direction of economic growth. It is found that a probit model with lags 1, 2, and 3 of the CLI is the best out of these models for predicting economic growth or contraction, with a McFadden R squared of .489. This probit model has a hit rate of 93.3% during the evaluation period, which is quite good. This model outperforms a simple strategy of predicting economic growth for every period, which would give a hit rate of 84.4% for this time period.