Nebraska Monthly Economic Indicators: December 19, 2014
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 1.33% during November
2014. The sharp decline in the LEI-N, which predicts economic growth in the state six months in
the future, suggests that economic growth will slow during the second quarter of 2015. Four of
six components of the leading economic indicator weakened during November. For the fourth
consecutive month, there was a significant increase in the value of the U.S. Dollar. Such an
increase reduces the competiveness of export businesses. There also was an increase in initial
unemployment claims during the month. Further, airline passenger counts and building permits
for single-family homes declined. Weakness among these key economic figures stands in
contrast to the outlook among Nebraska businesses. In particular, respondents to the Survey of
Nebraska Business predicted an increase in sales and employment over the next six months.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in November 2014,
compared to the previous month. The LEI-N predicts economic growth six months into the future. The
LEI-N fell by 1.33% in November.
Figure 1: Change in LEI-N
November 2014
2.44%
1.22%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-1.22%
Rapid Decline
-1.33%
-2.44%
Figure 2 shows the change in the LEI-N over the last 6 months. After a period of steady expansion, the
leading indicator declined during two of the three last months. The drop was especially steep during the
current month. This emerging pattern of uneven growth is consistent with slowing economic growth
during the second quarter of 2015. Naturally, it will be important to monitor the leading indicator to see
if the recent pattern persists during subsequent months.
1
Figure 2: Change in LEI - N
Last 6 Months
2.44%
1.73%
0.88%
1.22%
0.34%
0.01%
0.00%
-1.22%
-0.72%
-1.33%
-2.44%
Jun 14
Jul 14
Aug 14
Sep 14
Oct 14
Nov 14
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during
November 2014. The change in the overall LEI–N is the weighted average of changes in each component
(see page 5). During November, four of six components of the LEI-N declined. There was deterioration in
conditions for Nebraska exporting businesses, due to a sharp increase in the value of the U.S. dollar. This
is the fourth consecutive month with a significant increase in the value of the U.S. dollar. There also was
a dip in airline passenger counts and building permits for single-family homes during November. Further,
there was a sharp increase in initial claims for unemployment insurance during the month. Among
improving indicators, manufacturing hours were up slightly in November. At the same time, business
expectations were a bring spot for the economy. November respondents to the Survey of Nebraska
Business were positive about the prospects for sales and employment growth 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
November 2014
0.02%
0.44%
Business
Expectations
1.22%
Manufacturing
Hours
2.44%
0.12%
-0.13%
-0.36%
-0.57%
-0.86%
Initial UI Claims
-1.22%
Dollar Exchange
Rate
0.00%
Trend Adjustment
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. As seen in Figure 4, the CEI-N rose by 0.15% last month.
Figure 4: Change in CEI-N
November 2014
2.60%
1.30%
0.00%
Rapid Growth
Moderate Growth
0.15%
Moderate Decline
-1.30%
Rapid Decline
-2.60%
The CEI-N has grown for the past seven months, including rapid growth in June and October. This is the
longest sustained period of growth since the CEI-N was first released in January 2012. Growth over the
last six months is pictured in Figure 5. This period of solid economic growth is expected to continue for
the next few months.
Figure 5: Change in CEI-N
Last 6 Months
2.32%
2.60%
1.30%
1.16%
0.36%
0.32%
0.39%
0.15%
0.00%
-1.30%
-2.60%
Jun 14
Jul 14
Aug 14
Sep 14
Oct 14
Nov 14
As seen in Figure 6, three of the four components of the CEI-N rose during November. Agricultural prices
and business expectations were up solidly during the month. Respondents to the Survey of Nebraska
Business reported strong increases in both sales and employment. Real private wages rose modestly.
Among declining components, electricity sales fell in November after adjusting for weather and other
seasonal factors. 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
November 2014
2.60%
0.07%
1.30%
0.50%
0.31%
0.00%
-1.30%
-0.74%
Business
Conditions
Agricultural
Commodities
Private
Wages
Electricity
Sales
-2.60%
Figure 7 shows the forecast for the CEI-N over the next six months. The forecast suggests solid economic
growth during December of 2014. The forecast also calls for growth during January and February of
2015 but modest decline during the March through May period. These expectations are consistent with
recent values for the LEI-N (see Figure 2).
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
0.70%
1.25%
111.50
0.52%
0.75%
111.00
0.04%
0.25%
110.50
110.00
-0.25%
-0.05%
-0.08%
-0.28%
-0.75%
109.50
109.00
-1.25%
108.50
Nov 14
Dec 14
Jan 15
Feb 15
Index G rowth
Mar 15
Apr 15
May 15
Index Value
4
Weights and Component Shares
Table 1 shows the weights that were 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
13.8875
3.4932
1.1964
10.4554
1.4637
4.4762
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Inverse
STD
0.0720
0.2863
0.8359
0.0956
0.6832
0.2234
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0328
0.1303
0.3806
0.0435
0.3111
0.1017
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8114
1.6851
3.2345
3.8375
Inverse
STD
0.2078
0.5934
0.3092
0.2606
Weight
(Inverse STD
Standardize)
0.1516
0.4328
0.2255
0.1901
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between October and November
of 2014. 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
CEI-N by 0.12% 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
64.27
68.87
-4.61
0.03
-0.15
-0.13%
Airline Passengers
89.41
92.48
-3.07
0.13
-0.40
-0.36%
U.S. Dollar Exchange Rate
(Inverse)
97.00
98.67
-1.68
0.38
-0.64
-0.57%
Initial Unemployment
Insurance Claims (Inverse)
80.71
102.93
-22.22
0.04
-0.97
-0.86%
Manufacturing Hours
97.22
97.13
0.09
0.31
0.03
0.02%
Survey Business
Expectations 1
54.92
4.92
0.10
0.50
0.44%
Component
Trend Adjustment
Total (weighted average)
1
111.22
112.72
0.13
0.12%
-1.50
-1.33%
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
Difference
Weight
Contribution
Percentage
Contribution
(Relative to
Previous CEI-N)
Electricity Sales
116.68
122.00
-5.32
0.15
-0.81
-0.74%
98.29
98.12
0.17
0.43
0.07
0.07%
153.74
152.22
1.52
0.23
0.34
0.31%
2.89
0.19
0.55
0.50%
0.16
0.15%
Private Wage
Agricultural Commodities
Survey Business Conditions
Total (weighted average)
1
1
52.89
109.53
109.37
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.
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 0.91.
6-Month Forward Value of Leading Economic Indicator - Nebraska
Comparison with Coincident Economic Indicator - Nebraska
115.00
110.00
105.00
100.00
95.00
90.00
85.00
2001.1
2001.4
2001.7
2001.1
2002.1
2002.4
2002.7
2002.10
2003.1
2003.4
2003.7
2003.1
2004.1
2004.4
2004.7
2004.10
2005.1
2005.4
2005.7
2005.1
2006.1
2006.4
2006.7
2006.10
2007.1
2007.4
2007.7
2007.1
2008.1
2008.4
2008.7
2008.10
2009.1
2009.4
2009.7
2009.10
2010.1
2010.4
2010.7
2010.10
2011.1
2011.4
2011.7
2011.10
2012.1
2012.4
2012.7
2012.10
2013.1
2013.4
2013.7
2013.10
2014.1
2014.4
2014.7
2014.10
2015.1
2015.4
80.00
CEI -N (M ay 2007=100)
LE I-N, 6 Month F orward (May 2007=100)
6