Analysing and Forecasting Business Cycles with the Aid of Economic Indicators

Abstract

This paper provides a survey of the development and role of economic indicator analysis in measuring and analysing business cycles. Our major objective is to highlight the usefulness of leading and coincident indexes of economic activity, both for forecasting purposes and as an aid to macroeconomic policy. We show that the analysis of business cycles can be facilitated by distinguishing between classical cycles (which involve fluctuations in the level of aggregate economic activity) and growth cycles (recurring fluctuations in the rate of growth of economic activity around its trend). Many recent theoretical and empirical studies have concentrated on deviations from trend (that is, growth cycles) to the exclusion of classical cycles. We also argue for the use of a range of indicators, combined in a composite index, rather than using a single series such as gross domestic product as a proxy for the business cycle. We illustrate our survey with empirical evidence on the business cycles of the United States and Australia.