Economic problems and crisis
For the CPI forecasts, eight leading indicators are used. These variables were chosen because of their good individual performance in previous inflation forecasting exercises. In particular these variables performed well in at least one of the historical episodes considered in Staiger, Stock and Watson (1997).

Five of these variables are also used in the factor estimation step in the diffusion index forecasts: the total unemployment rate (Ihur); housing starts (hsbp); new orders in durable goods industries (mdoq); the nominal Ml money supply (fml); and the federal funds overnight interest rate (fyff). The remaining three variables are: real manufacturing and trade sales; the interest rate spread between 1-year U.S.

Treasury bonds and the federal funds rate; and the trade-weighted exchange rate listed in the previous paragraph.
In all cases, the leading indicators were transformed to be approximately stationary. This entailed taking logarithms of variables not already in rates, and differencing all variables except the interest rate spreads, housing starts, the index of vendor performance, and the help wanted index.

For each variable to be forecast, two leading indicator forecasts were produced. To be concrete, consider forecasts of IP. The first forecast uses all eleven leading indicators (so m= 11 in (5.3)), with p and q selected by recursive BIC, with 0<p