Nebraska Monthly Economic Indicators: September 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) rose by 1.37% during August
2014. The rise in the LEI-N, which predicts economic growth in the state six months in the future,
is the fifth in six months. The increase in the LEI-N represents a strong upward bounce after a
decline during July. Taking to two months together, results suggest that Nebraska should
experience solid economic growth during the first few months of 2015. Three components
contributed to the rise in the leading economic indicator in August. Single-family building
permits rose during August while initial unemployment claims declined. Both measures
improved significantly in August after being a source of weakness in July. Business expectations
also were positive in August. In particular, respondents to the Survey of Nebraska Business
predicted an increase in both sales and employment over the next six months. Among other
components, there was a decline in airline passenger counts and manufacturing hours during
August. There also was an increase in the value of the U.S. dollar during August, which is a
negative for Nebraska exporters.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in August 2014,
compared to the previous month. The LEI-N predicts economic growth six months into the future. The
LEI-N rose by 1.37% in July.
Figure 1: Change in LEI-N
August 2014
2.50%
1.25%
0.00%
Rapid Growth
1.37%
Moderate Growth
Moderate Decline
-1.25%
Rapid Decline
-2.50%
Figure 2 shows the change in the LEI-N over the last 6 months. The leading indicator rose in five of the
last six months. The increase in August is a strong recovery after the decline in July. Results from March
through June suggest that the Nebraska economy will experience strong growth for the remainder of
2014. Results for July and August, taken together, suggest that growth will continue during early 2015.
1
Figure 2: Change in LEI - N
Last 6 Months
2.50%
1.25%
1.74%
1.37%
1.21%
0.18%
0.20%
0.00%
-0.79%
-1.25%
-2.50%
Mar 14
Apr 14
May 14
Jun 14
Jul 14
Aug 14
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during August
2014. The change in the overall LEI–N is the weighted average of changes in each component (see page
5). During August, three of the six components of the LEI-N rose. Single-family building permits rose
solidly in August. Further, in a positive sign for the labor market, there also was a sharp decline in initial
unemployment insurance claims during the month. Both of these indictors improved during August after
substantial weakness during July. Business expectations also were positive in August as respondents to
the Survey of Nebraska Business predicted an increase in both sales and employment over the next six
months. Among negative components, there was a modest decline in airline passenger counts and
manufacturing hours in August. There also was a sharp increase in the value of the U.S. dollar, which is a
negative for Nebraska exporters. Note that the trend adjustment component pictured in Figure 3 is
discussed on page 5.
Figure 3: LEI-N Components of Change
August 2014
2.50%
0.31%
0.12%
Trend Adjustment
0.40%
Business
Expectations
0.94%
1.25%
0.00%
-0.08%
-1.25%
-0.01%
-0.32%
Manufacturing
Hours
Initial UI Claims
Dollar Exchange
Rate
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 just 0.04% last month.
Figure 4: Change in CEI-N
August 2014
2.62%
1.31%
Rapid Growth
Moderate Growth
0.04%
0.00%
Moderate Decline
-1.31%
Rapid Decline
-2.62%
The CEI-N has grown for four consecutive months, as seen in Figure 5. Growth has been modest,
however, over the last two months. It will be important to monitor whether the pace of growth
improves in the coming months.
Figure 5: Change in CEI-N
Last 6 Months
2.62%
1.32%
1.31%
0.55%
0.15%
0.04%
Jul 14
Aug 14
0.00%
-0.03%
-1.31%
-0.87%
-2.62%
Mar 14
Apr 14
May 14
Jun 14
As seen in Figure 6, two components of the CEI-N rose during August while two fell. Agricultural
commodity prices rose during August due to solid increases in beef prices during the month, although
corn prices fell. Real hourly wages improved during August as due to an improvement in employment,
hours worked and real hourly wages. There was a slight decline in business conditions as respondents to
the Survey of Nebraska Business reported a decline in sales. The major decline was in electricity sales.
Electricity sales declined during August even after adjusting for seasonally modest weather during the
second half of the month. 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
August 2014
2.62%
1.31%
0.26%
0.21%
0.00%
-1.31%
-0.03%
-0.40%
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 strong
economic growth during the fourth quarter of 2014. Economic growth also will be solid during the first
two months of 2015, though growth may moderate. These positive expectations are consistent with
recent values for the LEI-N (see Figure 2).
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
1.02%
1.25%
0.75%
0.31%
109.00
0.29%
0.24%
0.04%
0.25%
108.00
0.47%
107.00
-0.25%
106.00
-0.75%
105.00
-1.25%
104.00
Aug 14
Sep 14
Oct 14
Nov 14
Index G rowth
Dec 14
Jan 15
Feb 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
13.8661
3.5291
1.1898
10.5688
1.4736
4.5029
Inverse
STD
0.0721
0.2834
0.8405
0.0946
0.6786
0.2221
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0329
0.1293
0.3836
0.0432
0.3097
0.1013
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8337
1.6655
3.2355
3.8322
Inverse
STD
0.2069
0.6004
0.3091
0.2609
Weight
(Inverse STD
Standardize)
0.1502
0.4359
0.2244
0.1895
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between July and August 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
59.49
45.94
13.55
0.03
0.45
0.40%
Airline Passengers
89.70
90.41
-0.71
0.13
-0.09
-0.08%
U.S. Dollar Exchange Rate
(Inverse)
101.27
102.19
-0.91
0.38
-0.35
-0.32%
Initial Unemployment
Insurance Claims (Inverse)
104.03
79.93
24.10
0.04
1.04
0.94%
Manufacturing Hours
96.14
96.17
-0.03
0.31
-0.01
-0.01%
Survey Business
Expectations 1
53.42
3.42
0.10
0.35
0.31%
0.13
0.12%
1.51
1.37%
Trend Adjustment
Total (weighted average)
1
112.14
110.63
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
110.45
113.26
-2.81
0.15
-0.42
-0.40%
98.04
97.41
0.63
0.44
0.28
0.26%
150.85
149.86
1.00
0.22
0.22
0.21%
-0.17
0.19
-0.03
-0.03%
0.05
0.04%
Private Wage
Agricultural Commodities
Survey Business Conditions 1
Total (weighted average)
1
49.83
106.16
106.11
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