July 1991
Federal Reserve Bank of Dallas

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Misleading Indicators? Using the Composite Leading Indicators to Predict Cyclical Turning Points
Evan F. Koenig and Kenneth M. Emery

The U.S. Department of Commerce composite index of leading indicators (CLI) is a widely cited and influential economic series. In this article, Evan F. Koenig and Kenneth M. Emery examine how well movements in the CLI predict business-cycle turning points. Using data that actually would have been available to a forecaster, Koenig and Emery find that the CLI has provided no reliable advance warning of recessions and expansions. Further, in interpreting movements in the CLI, simple rules of thumb have often performed as well as more sophisticated forecasting methodologies.

While the evidence in this article indicates that the CLI may provide little or no advance warning of business-cycle turning points, the authors emphasize that the CLI may still give the earliest available indication of a change in the economy's direction.

A Return to Profitability: The Performance of Eleventh District Commercial Banks
Kevin J. Yeats

In 1990, the commercial banking industry in the Eleventh Federal Reserve District posted profits for the first time in five years. Kevin Yeats examines this turnaround and concludes that banks returned to profitability for three reasons: the Federal Deposit Insurance Corporation (FDIC) took over many bad loans as it resolved failed banks, banks lowered their burden from nonperforming loans by realizing losses and removing bad loans from the books, and improvement in the regional economy enabled some borrowers to catch up on delinquent payments. Yeats predicts that if delinquencies continue to decline and net income remains positive at Eleventh District banks, the region's banking industry can proceed to full financial recovery.

Yeats notes that from late 1987 through 1990 the general improvement in the Southwest economy was not reflected in the performance of this region's banks. To reach that conclusion, Yeats examines the performance of banks that received no FDIC assistance during this time and finds that their improved capital ratios followed the region's economic upswing with a lag of at least three years.