Nebraska Monthly Economic Indicators: August 15, 2014
Prepared by the UNL College of Business Administration, Department of Economics
Authors: Dr. Eric Thompson, Dr. William Walstad
Graduate Research Assistants: Shannon McClure
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 .75% during July 2014. The
decline in the LEI-N, which predicts economic growth in the state six months in the future, is the
first in six months. The decline suggests that economic growth may slow in Nebraska in early
2015 after strong growth in the second half of 2014. Three components contributed to the
decline in the leading economic indicator in July. There was a decline in manufacturing hours
and in single-family building permits during the month. There also was an increase in initial
claims for unemployment insurance during July, a negative for the job market. Among positive
components, business expectations remained positive in Nebraska for the sixth consecutive
month. In particular, July respondents to the Survey of Nebraska Business predicted an increase
in both sales and employment at their business over the next six month. There also was a
modest decline in the value of the U.S. dollar during July, which is a positive for exporters.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in July 2014, compared
to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N
declined by 0.75% in July.
Figure 1: Change in LEI-N
July 2014
2.50%
1.25%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.75%
-1.25%
Rapid Decline
-2.50%
Figure 2 shows the change in the LEI-N over the last 6 months. The leading indicator rose for five
consecutive months before declining in July. The five consecutive months of increase suggest that there
will be strong growth in the Nebraska economy in the second half of 2014. The decline in July suggests
that the rate of growth may slow as 2015 begins. It will be important to monitor value of the LEI-N over
the next few months to see if it continues to suggest slowing economic growth in early 2015.
1
Figure 2: Change in LEI - N
Last 6 Months
2.50%
2.15%
1.24%
0.95%
1.25%
0.10%
0.14%
0.00%
-1.25%
-0.75%
-2.50%
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during July
2014. The change in the overall LEI–N is the weighted average of changes in each component (see page
5). During July, three of the six components of the LEI-N fell. There was a decline in single-family building
permits in Nebraska during July. There also was a modest decline in manufacturing hours in July
following strong growth in both May and June. There was an increase in initial claims for unemployment
insurance during July, indicating that the Nebraska labor market continues to face challenges. Among
positive components, business expectations were positive in July as respondents to the Survey of
Nebraska Business predicted an increase in both sales and employment over the next six months.
Business expectations, however, moderated relative to strong growth expectations in June. The airline
passenger count component was positive in July. The small decline in the U.S. dollar during July is a
positive 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
July 2014
2.50%
0.34%
1.25%
0.12%
0.09%
0.12%
0.00%
-1.25%
-0.35%
-0.16%
-0.90%
Trend Adjustment
Business
Expectations
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 0.09% last month.
Figure 4: Change in CEI-N
July 2014
2.62%
1.31%
Rapid Growth
Moderate Growth
0.09%
0.00%
Moderate Decline
-1.31%
Rapid Decline
-2.62%
There also was an upward revision for CEI-N growth during June, due to an upward adjustment in data
for both manufacturing hours and electricity sales during the month. As seen in Figure 5, economic
growth improved in Nebraska in the second quarter of 2014, after weakness during the first quarter. The
CEI-N grew solidly in May and strongly in June of 2014. Net growth during the April to June quarter also
was solidly positive. Growth is expected to improve further in the third and fourth quarters of 2014 (see
Figure 7).
Figure 5: Change in CEI-N
Last 6 Months
2.62%
1.20%
1.31%
0.46%
0.09%
0.09%
0.00%
-0.01%
-1.31%
-0.75%
-2.62%
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14
As seen in Figure 6, two components of the CEI-N rose during July while two fell. Agricultural commodity
prices rose during July due to solid increases in beef prices during the month, although corn prices fell.
Business conditions were a modest positive as respondents to the Survey of Nebraska Business reported
an increase in employment in recent months. However, electricity sales were a slight negative during
July, after adjusting for weather and other seasonal factors. There also was a decline in private wages
during July due to lower real hourly wages. 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
July 2014
2.62%
1.31%
0.08%
0.25%
0.00%
-0.03%
-1.31%
-0.22%
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 growth in
the Nebraska economy during the third quarter, due to strong growth in August. Even stronger growth is
expected during the fourth quarter, with the Nebraska economy growing in October, November and
December. A slight decline in the CEI-N is anticipated for January 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
1.07%
1.25%
0.89%
110.00
0.51%
0.75%
109.00
0.37%
0.25%
108.00
-0.06%
-0.25%
-0.02%
-0.75%
107.00
106.00
-1.25%
105.00
Jul 14
Aug 14
Sep 14
Oct 14
Index G rowth
Nov 14
Dec 14
Jan 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
13.8447
3.5333
1.1909
10.5183
1.4889
4.5151
Inverse
STD
0.0722
0.2830
0.8397
0.0951
0.6717
0.2215
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0331
0.1296
0.3846
0.0435
0.3077
0.1014
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8426
1.6856
3.1190
3.8437
Inverse
STD
0.2065
0.5933
0.3206
0.2602
Weight
(Inverse STD
Standardize)
0.1496
0.4297
0.2322
0.1885
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between June and July 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
45.50
57.26
-11.77
0.03
-0.39
-0.35%
Airline Passengers
91.47
90.47
1.00
0.13
0.13
0.12%
U.S. Dollar Exchange Rate
(Inverse)
102.19
101.94
0.25
0.38
0.10
0.09%
Initial Unemployment
Insurance Claims (Inverse)
79.27
102.35
-23.08
0.04
-1.01
-0.90%
Manufacturing Hours
97.16
97.75
-0.59
0.31
-0.18
-0.16%
Survey Business
Expectations 1
53.78
3.78
0.10
0.38
0.34%
Component
Trend Adjustment
Total (weighted average)
1
111.03
111.86
0.13
0.12%
-0.84
-0.75%
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
114.46
114.65
-0.19
0.15
-0.03
-0.03%
97.50
98.03
-0.54
0.43
-0.23
-0.22%
149.09
147.95
1.14
0.23
0.26
0.25%
0.46
0.19
0.09
0.08%
0.09
0.09%
Private Wage
Agricultural Commodities
Survey Business Conditions 1
Total (weighted average)
1
50.46
106.73
106.64
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