This paper describes the methodologies used for constructing a composite leading indicator for the Austrian economy (CLI-AT).
First, a selection of those monthly indicators which overall fare best in showing a "steady" leading behaviour with respect
to the Austrian business cycle was performed. The analysis was carried out by means of statistical methods out of the timeseries
domain as well as from the frequency domain. Thirteen series have been finally classified as leading indicators. Among them,
business and consumer survey data form the most prevalent group. Second, I construct the CLI-AT based on the de-trended, normalised
and weighted leading series. For the de-trending procedure I use the HP filter and the weights have been obtained by means
of principal components analysis. Further, idiosyncratic elements in the CLI-AT have been removed along with checking the
endpoint-bias due to the HP filter smoothing procedure. I find that the "real-time" smoothed CLI-AT does not exhibit severe
phase-shifts compared to a full-sample estimate. Next, I show that the CLI-AT provides a useful instrument for assessing the
current and likely future direction in the Austrian business cycle. Over the period 1988-2008, the CLI-AT indicates cyclical
turns with a "steady" lead in the majority of cases. Finally, in using an out-of-sample forecasting exercise it is shown that
the CLI-AT carries important business cycle information and that its inclusion in a forecasting model can increase the projection
quality of the underlying reference series.
Keywords:Business cycles, turning points, cyclical analysis, leading indicators, composite indicators, HP filter, principal components,
out-of-sample forecasting KP_Berichte_Analysen
Research group:Macroeconomics and European Economic Policy