Dating U.S. Business Cycles with Macro Factors

A probit model is used to show that latent common factors estimated by principal components from a large number of macroeconomic time series have important predictive power for NBER recession dates. A pseudo out-of-sample forecasting exercise shows that predicted recession probabilities consistently rise during subsequently declared NBER recession dates. The latent variable in the factor-augmented probit model is interpreted as an index of real business conditions which can be used to assess the strength of an expansion or the depth of a recession.