Nebraska Monthly Economic Indicators: October 17, 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 0.45% during September
2014. The decline in the LEI-N, which predicts economic growth in the state six months in the
future, is the second in three months and suggests that Nebraska economic growth will slow. In
particular, state economic growth is expected to slow in the first quarter of 2015. Three
components contributed to the decline in the leading economic indicator in September. Most
importantly, there was a significant increase in the value of the U.S. Dollar. Such an increase
reduces the competiveness of exporters in Nebraska and throughout the United States. There
also was a decline in airline passenger counts during September, and an increase in initial claims
for unemployment insurance. Among other measures, there was no change in manufacturing
hours during the month and a slight improvement in building permits, after seasonal
adjustment. Business expectations were slightly positive. In particular, respondents to the
Survey of Nebraska Business predicted only a small increase in employment over the next six
month.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in September 2014,
compared to the previous month. The LEI-N predicts economic growth six months into the future. The
LEI-N fell by 0.45% in September.
Figure 1: Change in LEI-N
September 2014
2.50%
1.25%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.45%
-1.25%
Rapid Decline
-2.50%
Figure 2 shows the change in the LEI-N over the last 6 months. While the leading indicator rose steadily
from April through June, it has declined two of the last three months. These results for July through
September portend slower growth for the Nebraska economy during the first quarter of 2015.
1
Figure 2: Change in LEI - N
Last 6 Months
2.50%
1.72%
1.20%
1.64%
1.25%
0.25%
0.00%
-0.45%
-1.25%
-0.72%
-2.50%
Apr 14
May 14
Jun 14
Jul 14
Aug 14
Sep 14
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during
September 2014. The change in the overall LEI–N is the weighted average of changes in each component
(see page 5). During September, three of the six components of the LEI-N declined. In particular, there
was deterioration in conditions for Nebraska exporting businesses, due to a sharp increase in the value
of the U.S. dollar. There also was a dip in airline passenger counts and an increase in initial claims for
unemployment insurance, after adjusting for seasonality. Weak business expectations also were a
factor. After months of optimism, September respondents to the Survey of Nebraska Business were not
enthusiastic about growth prospects for the next six months. Expectations were barely positive, based
on an expectation for a modest increase in employment. Building permits rose during September, after
adjusting for seasonal factors. There was no change in manufacturing hours. Note that the trend
adjustment component pictured in Figure 3 is discussed on page 5.
Figure 3: LEI-N Components of Change
September 2014
0.10%
0.02%
0.12%
Trend Adjustment
1.25%
Business
Expectations
2.50%
-0.52%
-0.10%
Initial UI Claims
-0.06%
-1.25%
Dollar Exchange
Rate
0.00%
0.00%
Manufacturing
Hours
Airline Passengers
Building Permits
-2.50%
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 a robust 1.37% last month.
Figure 4: Change in CEI-N
September 2014
2.62%
Rapid Growth
1.37%
1.31%
0.00%
Moderate Growth
Moderate Decline
-1.31%
Rapid Decline
-2.62%
The CEI-N has grown for five consecutive months, as seen in Figure 5, including strong growth in both
June and September. The key question is whether this economic growth will continue.
Figure 5: Change in CEI-N
Last 6 Months
2.62%
1.37%
1.18%
1.31%
0.54%
0.35%
0.18%
0.00%
-1.31%
-0.88%
-2.62%
Apr 14
May 14
Jun 14
Jul 14
Aug 14
Sep 14
As seen in Figure 6, three components of the CEI-N rose during September while just one fell. Electricity
sales rose sharply in September on a seasonally-adjusted basis. This increase largely reflects a recovery
after weak sales in July and August. Reported business conditions also were strong during September.
Respondents to the Survey of Nebraska Business reported recent increases in both sales and
employment. Real private wages also rose modestly during September, as increases in jobs, weekly
hours, and hourly wages exceeded inflation during the month. Among declining components,
agricultural commodity prices fell during September as the sharp decline in corn prices outweighed
improvements in beef prices. 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
September 2014
2.62%
1.31%
0.95%
0.39%
0.06%
0.00%
-0.03%
-1.31%
Business
Conditions
Agricultural
Commodities
Private
Wages
Electricity
Sales
-2.62%
Figure 7 shows the forecast for the CEI-N over the next six months. The forecast suggests solid economic
growth during the last quarter of 2014. The forecast also calls for growth to slow during the first quarter
of 2015. These expectations are consistent with recent values for the LEI-N (see Figure 2).
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
1.25%
111.00
0.76%
0.75%
0.58%
0.23%
0.25%
110.00
0.41%
0.25%
109.00
0.00%
-0.25%
-0.75%
108.00
107.00
-1.25%
106.00
Sep 14
Oct 14
Nov 14
Dec 14
Index G rowth
Jan 15
Feb 15
Mar 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
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Standard
Deviation
13.8425
3.4989
1.1925
10.5511
1.4668
4.5005
Inverse
STD
0.0722
0.2858
0.8386
0.0948
0.6817
0.2222
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0329
0.1302
0.3820
0.0432
0.3105
0.1012
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8283
1.6571
3.2324
3.8311
Inverse
STD
0.2071
0.6035
0.3094
0.2610
Weight
(Inverse STD
Standardize)
0.1500
0.4370
0.2240
0.1890
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between August and September 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)
Component
Contribution
Percentage
Contribution
(Relative to
Previous LEI-N)
Current
Previous
Difference
Weight
SF Building Permits
64.07
60.80
3.26
0.03
0.11
0.10%
Airline Passengers
89.22
89.70
-0.48
0.13
-0.06
-0.06%
U.S. Dollar Exchange Rate
(Inverse)
99.74
101.27
-1.53
0.38
-0.59
-0.52%
Initial Unemployment
Insurance Claims (Inverse)
102.66
105.39
-2.73
0.04
-0.12
-0.10%
Manufacturing Hours
97.17
97.18
-0.02
0.31
0.00
0.00%
Survey Business
Expectations 1
50.25
0.25
0.10
0.03
0.02%
Trend Adjustment
Total (weighted average)
1
112.04
112.54
0.13
0.12%
-0.51
-0.45%
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
118.20
111.43
6.77
0.15
1.02
0.95%
Private Wage
Agricultural Commodities
Survey Business Conditions 1
Total (weighted average)
1
98.19
98.05
0.14
0.44
0.06
0.06%
150.71
150.86
-0.15
0.22
-0.03
-0.03%
2.18
0.19
0.41
0.39%
1.45
1.37%
52.18
107.75
106.30
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
80.00
CEI -N (M ay 2007=100)
LE I-N, 6 Month F orward (May 2007=100)
6