Transcript CBLeading

Conference Board’s Leading
Economic Indicator
Presented by:
Robert Alcala
Brian Truong
Yingsak Vanpetch
Introduction
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Source: Conference Board
Frequency: Monthly
Period Covered: Prior Month
Volatility: Revised the next month
– Uses Estimates of certain components when actual
data is not yet available
• Market Significance: moderate to high
• Website: http://www.conferenceboard.org/economics/bci/
What is it?
• It is an Index.
• Composite Indicator
– Ten Components meant to lead the Economy.
That is, this indicator peaks before the
Economy does, and troughs before the
economy does.
Criteria for Each Indicator
• Each indicator was chosen to best match
the following six criteria:
– Conformity – to the business cycle
– Consistent Timing – pattern as leading
– Economic Significance- economically logical
– Statistical Adequacy- collected and processed
reliably
– Smoothness – movements not too erratic
– Currency- Published reasonably promptly
What is in the Report?
• Average Weekly Hours (manufacturing)
– Adjustments to working hours are made in
advance of new hires or layoffs
• Average weekly jobless claims for
unemployment insurance
– Reverses value of this component
– More sensitive to business conditions than
other measures of unemployment
• Manufacturer’s new orders for consumer
goods/materials
– Increases in new orders for consumer goods
usually mean positive changes in actual
production
• Vendor performance –
– Time it takes to deliver
– Longer time means more business.
(manufacturing supplies)
• Manufacturer's new orders for nondefense capital goods
– Increases in order means positive changes in
actual production
– Counterpart of new orders for consumer
goods
• Building permits for new private housing
units
– Permits mean future construction and that’s
ahead of other types of production
• The Standard and Poor’s 500 stock index
– Changes in stock prices reflect investor’s
expectations for the future of the economy
and interest rates
– S&P incorporates 500 largest companies in
US
• Money Supply (M2)
– Demand deposits, traveler’s checks, savings
deposits, currency, money market accounts
and small-denomination time deposits
– Adjusted for inflation
– Bank lending declines when inflation
increases faster than MS. This makes
expansions difficult.
– Increase in DD = expectations inflation will
rise, decrease in bank lending, savings up.
• Interest rate Spread (10 year Treasury vs
Federal Funds target)
– Yield curve
– Implies expected direction of short-, medium-,
and long term interest rates.
– Inverted generally precede recession
• Index of Consumer expectations
– Optimism means increased future spending
How is information collected?
• Much of data comes from other
organizations. For example:
– Average weekly hours and jobless claims
comes from the Department of Labor
– Vendor performance comes from a monthly
survey from the National Association of
Purchasing Managers
– Consumer Expectations from University of
Michigan’s Survery Research Center
Why is this indicator important?
• This leads the economy
• The indicators are parts of the demand
side of the economy either directly or
indirectly. For example,
– Factory orders are direct
– Stock prices increases (wealth increases
means consumer spending increases) are
indirect
Indicator Coverage
• This indicator is on the National Level.
How do we interpret the Data?
• We look at one number, the percentage
change.
• We want to notice consecutive changes or
patterns.
• Rule of thumb: Three consecutive declines
in index within three months signals a
recession
• Not foolproof
• Economists like to see a sharp, prolonged
decline of more than 1% accompanied by
broad based declines in most components
to signal recession
• Diffusion Index measures breadth
Calculating the Diffusion Index
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Calculate if a component had a positive change, a
negative change or no change at all.
Components that rise more than 0.05% receive a
value of 1; components that change less than 0.05%
receive a value of 0.5; and components that fall more
than 0.05% receive a value of zero.
Sum the values of the components, as calculated in
step 2.
Divide by the total number of components (for the CB's
leading index, there are 10; for the coincident index,
four; and for the lagging in index, seven).
Multiply by 100.
Caveats and Key Points
• To some, it is only a marginal Predictor of
economic downturns
• Historical data revised so chart is different
• When exactly recession began or ended in
dispute
• But overall useful.
• Should be used in conjunction with other
indicators like coincident and lagging.
Latest Release and Analysis
• Leading index increased slightly in March
following two consecutive declines
• The weaknesses among the indicators
have become increasingly more
widespread than the strengths over the
past few months
• Despite a small pick up in December, the
leading index has been essentially flat
since mid-2006.
• At the same time, real GDP growth was at
a 2.5 percent annual rate in the fourth
quarter of 2006, following a 2.0 percent
rate in the third quarter.
• The recent behavior of the leading and
coincident indexes suggests that slow
economic growth is likely to continue in the
near term.
Index Values for Past Six Months
Conclusion
• Look at percentage change not actually
value
• Strong indicators but not foolproof
• Best used in conjunction with other
indicators
• The economy right now is expanding but
seems to be nearing a slow down.