Page 156 - Contributed Paper Session (CPS) - Volume 8

CPS2223 Siti Nuraini R. et al.
Chart 2: Six-Month Growth Rate (Annualized) of the LI:
January 1991 to October 2018

4. Discussion and Conclusion
The duration of a decline is perhaps the most obvious indication of
imbalances in the economy, which might eventually enter a recession as a
result. According to the result of Three D’s approach conducted by the
Conference Board using the Composite Index of Leading Economic Indicators
for the period of 1959 to 2000, they found a false signal. The false signal should
also be recognized that these predictions of recessions that did not materialize
are not necessarily flaws. Sometimes false signals are quite insightful because
the LI is sensitive enough to point to imbalances in the economy that could
result in a recession. The LI turned down significantly, even though a recession
did not follow. Because economic growth weakened slightly thereafter, many
economists believe that the index warned appropriately that the risk of a
recession had increased.
The false signals occur because of reliance on a rule-based, naive reading
of the LI. If all available indicators are interpreted thoroughly, individually as
well as in combination, the risks of the economy entering a recession can be
evaluated more realistically. To increase the chances of getting true signals
and reduce those of getting false ones, it is advisable to rely on all such
potentially useful indicators as a group.” (Business Conditions Digest, May
1975).
For the Malaysia Case, Three D’s approach is able to give an early signal of
recession based on LI time series data from January 1991 to October 2018.
However, it is suggested to use other approach such as Markov-Switching
model developed by Hamilton (1996) to examine the accuracy of time series
forecasts of recessions and expansions of the Malaysian economy.

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