How Did Leading Indicator Forecasts Perform During the 2001 Recession?

T he recession that began in March 2001 differed in many ways from other recessions of the past three decades. The twin recessions of the early 1980s occurred when the Federal Reserve Board, under Chairman Paul Volcker, acted decisively to halt the steady rise of inflation during the 1970s, despite the substantial employment and output cost to the economy. Although monetary tightening had reduced the growth rate of real activity in 1989, the proximate cause of the recession of 1990 was a sharp fall in consumption, a response by consumers to the uncertainty raised by Iraq’s invasion of Kuwait and the associated spike in oil prices (Blanchard 1993). In contrast, the recession of 2001 started neither in the shopping mall nor in the corridors of the Federal Reserve Bank, but in the boardrooms of corporate America as businesses sharply cut back on expenditures—most notably, investment associated with information technology—in turn leading to declines in manufacturing output and in the overall stock market. Because it differed so from its recent predecessors, the recession of 2001 provides a particularly interesting case in which to examine the forecasting performance of various leading economic indicators. In this article, we take a look at how a wide range of leading economic indicators performed during this episode. Did these leading economic indicators predict a slowdown of growth? Was that slowdown large enough to suggest that a recession was