Purchasing and supply managers provide early clues on the direction of the US economy : An application of a new market-timing test

Article history: Received 24 August 2012 Received in revised form 7 September 2013 Accepted 9 September 2013 Available online 16 September 2013 We evaluate the directional accuracy of Institute for Supply Management (ISM) indices in predicting the direction of the US economydirection; to do so, wemake use of amethod developed by Pesaran and Timmermann (2009). By illustrating an application of the new market-timing test and extending it to a joint evaluation of increase/decrease and acceleration/deceleration, we show that while the ISM indices are useful predictors of industrial production and employment with regard tomonthly economic activity and to business cycle expansion/recession, they are not useful predictors of real gross domestic product or hours worked. Our findings suggest that the ISM indices broadly provide early qualitative information on the US economy. Our findings also suggest that the importance of the nonmanufacturing sector becomes clear when examining business cycles in the U.S. © 2013 Elsevier Inc. All rights reserved. JEL classification: C53 E17 E37