A new composite leading indicator for Turkish economic activity

The aim of this paper is to construct a composite leading indicator (CLI) for Turkish economic activity that would crucially provide earlier signals of turning points between economic expansions and slowdowns. First, for this analysis, the index of industrial production is selected as an indicator for economic activity. Second, a group of variables that perform well both in forecasting and in tracking cyclical developments of economic activity, is selected from a broad set of economic indicators related to industrial production. While constructing the CLI, a growth cycle approach is used. The resulting cyclical patterns of the series are obtained by eliminating seasonal, irregular and trend components via TRAMO/SEATS programs and Hodrick-Prescott filter. The selection of the component series is based on theoretical economic significance and their leading performance at cyclical turning points. From the selected series, different CLIsre constructed, and that with the best performance is chosen as the CLI or Turkish economic activity.