Download Nebraska Monthly Economic Indicators: January 15, 2016

Nebraska Monthly Economic Indicators: January 15, 2016
Prepared by the UNL College of Business Administration, Department of Economics
Authors: Dr. Eric Thompson, Dr. William Walstad
Leading Economic Indicator..…………………………………………….1
Coincident Economic Indicator……………………………………….…3
Weights and Component Shares…………………………………….…5
Performance of the LEI-N and CEI-N…………….……………………6
Summary: The Leading Economic Indicator – Nebraska (LEI-N) fell by 0.12% in December 2015.
The slight decline in the LEI-N, which predicts economic growth in the state six months in the
future, suggests that economic growth in Nebraska will be solid, rather than strong, during the
first half of 2016. The decline follows significant increases in the LEI-N in both October and
November. Among components of the indicator, the value of the U.S. dollar rose during
December. A higher U.S. dollar reduces the competitiveness of Nebraska exporters in
manufacturing and agriculture. There also was a decline in airline passenger counts and
manufacturing hours during December, as well as a slight decrease in building permits for singlefamily homes. Initial claims for unemployment insurance changed little during December on a
seasonally-adjusted basis. Finally, business expectations were a positive factor during December.
Respondents to the Survey of Nebraska Business predicted growth in employment over the next
6 months.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in December 2015,
compared to the previous month. The LEI-N predicts economic growth six months into the future. The
LEI-N fell by 0.12% during December.
Figure 1: Change in LEI-N
December 2015
2.44%
1.22%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.12%
-1.22%
Rapid Decline
-2.44%
Figure 2 shows the change in the LEI-N over the last 6 months. The figure shows that the LEI-N has risen
four out of the last six months. The LEI-N was mixed during the July through September period with growth
in July and August reversed during September. Growth was stronger during the 4th quarter, with the
modest decline in December following strong growth in October and November.
1
Figure 2: Change in LEI - N
Last 6 Months
2.44%
1.22%
1.73%
0.67%
0.66%
0.63%
0.00%
-0.12%
-1.22%
-1.46%
-2.44%
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
Dec 15
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during December
2015. The change in the overall LEI–N is the weighted average of changes in each component (see page
5). Among individual components, there was another significant increase in the value of the U.S. dollar
during December. This is a negative for Nebraska’s export-oriented businesses in manufacturing and
agricultural. Most other components of the LEI-N declined modestly during December. There was a
decline in both airline passenger counts and manufacturing hours. These also was a slight decrease in
building permits for single-family homes, on a seasonally-adjusted basis. There was little change in initial
claims for unemployment insurance during the month. Business expectations were a positive factor for
the LEI-N. Specifically, respondents to the December Survey of Nebraska Business predicted solid
increases in employment at their businesses over the next six months. Note that the trend adjustment
component pictured in Figure 3 is discussed on page 5.
Figure 3: LEI-N Components of Change
December 2015
0.33%
0.11%
Trend Adjustment
1.22%
Business Expectations
2.44%
0.00%
-1.22%
-0.05%
-0.13%
-0.29%
-0.02%
-0.08%
Manufacturing Hours
Initial UI Claims
Dollar Exchange Rate
Airline Passengers
Building Permits
-2.44%
2
Coincident Economic Indicator – Nebraska
The Coincident Economic Indicator - Nebraska (CEI-N) is a measure of the current size of the Nebraska
economy. The CEI-N fell by 0.31% during December, as seen in Figure 4.
Figure 4: Change in CEI-N
December 2015
2.58%
1.29%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.31%
-1.29%
Rapid Decline
-2.58%
The CEI-N has strengthened during the second half of 2015, as seen in Figure 5. Specifically, declines in
the CEI-N during September and December following strong growth in the previous months, particularly
during the month of August. Taking all months together, there was significant growth in the LEI-N during
both the 3rd and 4th quarters of 2015.
Figure 5: Change in CEI-N
Last 6 Months
2.58%
2.24%
1.09%
1.29%
0.81%
0.71%
0.00%
-0.31%
-0.53%
-1.29%
-2.58%
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
Dec 15
As seen in Figure 6, two of four components of the CEI-N rose during December. Business conditions, as
measured in the December Survey of Nebraska Business, were solid. Responding businesses reported
growth in both sales and employment. Electricity sales also grew during December, after adjusting for
weather and other seasonal factors. There was a decline in real private wages. Wages fell after a strong
increase during in previous months. Agricultural commodity prices continued their decline during
December. In particular, beef prices have fallen sharply in recent months. A detailed discussion of the
components of the CEI-N and LEI-N can be found at www.cba.unl.edu in Technical Report: Coincident and
Leading Economic Indicators- Nebraska.
3
Figure 6: CEI-N Components of Change
December 2015
2.58%
1.29%
0.47%
0.15%
0.00%
-0.40%
-1.29%
-0.53%
Business
Conditions
Agricultural
Commodities
Private
Wages
Electricity
Sales
-2.58%
Figure 7 shows the forecast for the CEI-N over the next six months. The forecast calls for solid economic
growth in Nebraska during the first half of 2016, as would be expected given trends in the LEI-N during
the last six months (see Figure 2). A modest decline, however, is expected in February 2016.
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
1.25%
120.00
0.75%
0.67%
0.49%
119.00
0.44%
0.09%
0.25%
-0.25%
0.16%
118.00
117.00
-0.11%
-0.75%
116.00
-1.25%
115.00
Dec 15
Jan 16
Feb 16
Mar 16
Index Growth
Apr 16
May 16
Jun 16
Index Value
4
Weights and Component Shares
Table 1 shows the weights used to aggregate the individual components into the LEI-N and CEI-N. The
weights are the inverse of the “standardized” standard deviation of each component variable. The term
standardized simply means that the inverse standard deviations are adjusted proportionately to sum to
1. This weighting scheme makes sense since individual components that are more stable have smaller
standard deviations, and therefore, a larger inverse standard deviation. A large movement in a typically
stable economic series would provide a more powerful signal of economic change than a large movement
in a series that regularly has large movements.
Table 1: Component Weights for LEI-N and CEI-N
Leading Economic Indicator - Nebraska
Standard
Deviation
13.5770
3.4099
1.2085
10.2056
1.5862
4.3893
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Inverse
STD
0.0737
0.2933
0.8275
0.0980
0.6304
0.2278
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0342
0.1364
0.3848
0.0456
0.2931
0.1059
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.7433
1.7316
3.2723
3.8632
Inverse
STD
0.2108
0.5775
0.3056
0.2589
Weight
(Inverse STD
Standardize)
0.1558
0.4269
0.2259
0.1913
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between November and December
of 2015. Weights (from Table 1) are multiplied by the change to calculate the contribution of each
component. Contributions are converted to percentage terms and summed. Note that in Table 2 a trend
adjustment factor is utilized in calculating LEI-N. This is done because LEI-N historically under-predicts CEIN by 0.11% per month. The U.S. Leading Economic Indicator also has a trend adjustment.
T able 2: Component Contributions to the Change in Leading Economic Indicator
Leading Economic Indicator - Nebraska
Component Index Value (May 2007=100)
Current
Previous
Difference
Weight
Contribution
Percentage
Contribution
(Relative to
Previous LEI-N)
SF Building Permits
73.35
74.98
-1.63
0.03
-0.06
-0.05%
Airline Passengers
95.78
96.89
-1.12
0.14
-0.15
-0.13%
U.S. Dollar Exchange Rate
(Inverse)
85.44
86.34
-0.90
0.38
-0.35
-0.29%
Initial Unemployment
Insurance Claims (Inverse)
Component
112.35
112.87
-0.52
0.05
-0.02
-0.02%
Manufacturing Hours
97.50
97.81
-0.31
0.29
-0.09
-0.08%
Survey Business
Expectations 1
53.72
3.72
0.11
0.39
0.33%
Trend Adjustment
Total (weighted average)
1
118.80
118.94
0.13
0.11%
-0.14
-0.12%
Survey results are a diffusion Index, which is always compared to 50
T able 3: Component Contributions to the Change in Coincident Economic Indicator
Coincident Economic Indicator - Nebraska
Component Index Value (May 2007=100)
Component
Current
Previous
Electricity Sales
136.09
Private Wage
105.99
134.74
Agricultural Commodities
Survey Business Conditions
Total (weighted average)
1
1
Difference
Weight
134.99
1.10
0.16
0.17
0.15%
107.10
-1.11
0.43
-0.47
-0.40%
137.47
-2.74
0.23
-0.62
-0.53%
2.90
0.19
0.56
0.47%
-0.37
-0.31%
52.90
116.91
117.28
Contribution
Percentage
Contribution
(Relative to
Previous CEI-N)
Survey results are a diffusion Index, which is always compared to 50
5
Performance of the LEI-N and CEI-N
Further information is available on both economic indicators to demonstrate how well the CEI-N tracks
the Nebraska economy and how well the LEI-N leads the CEI-N. Figure 8 shows the value of CEI-N and the
real gross state product (real GDP) in Nebraska for 2001 through 2012. The comparison ends in 2012 since
this is the last year for which data on real gross state product is available. Annual real gross state product
data is provided by the Bureau of Economic Analysis, U.S. Department of Commerce, and quarterly values
were estimated using quarterly earnings data. CEI-N closely tracks Nebraska real GDP for the period. The
correlation coefficient between the two pictured series is 0.96.
Figure 8: Coincident Economic Indicator - Nebraska
Comparison with Nebraska Real Quarterly GDP
115.00
110.00
105.00
100.00
95.00
90.00
85.00
2001.1
2001.5
2001.9
2002.1
2002.5
2002.9
2003.1
2003.5
2003.9
2004.1
2004.5
2004.9
2005.1
2005.5
2005.9
2006.1
2006.5
2006.9
2007.1
2007.5
2007.9
2008.1
2008.5
2008.9
2009.1
2009.5
2009.9
2010.1
2010.5
2010.9
2011.1
2011.5
2011.9
2012.1
2012.5
2012.9
80.00
CEI-N (May 2007=100)
Real GDP (May 2007=100), SA
Figure 9 again shows the values for the CEI-N. It also graphs 6-months forward values for the LEI-N. Recall
that the LEI-N is intended to forecast the Nebraska economy six months into the future. This implies that
Figure 9 is comparing the predicted movement in CEI-N (predicted by LEI-N values six months earlier) with
the actual movement in CEI-N. In Figure 9, predicted values using the LEI-N closely track trends and
movement in the CEI-N. The correlation coefficient between CEI-N and six-month forward values of LEI-N
is 0.92.
Figure 9: 6-Month Forward Value of Leading Economic Indicator - Nebraska
Comparison with Coincident Economic Indicator - Nebraska
120.00
115.00
110.00
105.00
100.00
95.00
90.00
85.00
CEI-N (May 2007=100)
2016.5
2016.1
2015.9
2015.5
2015.1
2014.9
2014.5
2014.1
2013.9
2013.5
2013.1
2012.9
2012.5
2012.1
2011.9
2011.5
2011.1
2010.9
2010.5
2010.1
2009.9
2009.5
2009.1
2008.9
2008.5
2008.1
2007.9
2007.5
2007.1
2006.9
2006.5
2006.1
2005.9
2005.5
2005.1
2004.9
2004.5
2004.1
2003.9
2003.5
2003.1
2002.9
2002.5
2002.1
2001.9
2001.5
2001.1
80.00
LEI-N, 6 Month Forward (May 2007=100)
6