Nebraska Monthly Economic Indicators: July 18, 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) rose by 1.01% during June 2014.
The rise in the LEI-N, which predicts economic growth in the state six months in the future, is the
fifth consecutive monthly increase. Cumulatively, these increases provide reliable evidence of
solid growth in the Nebraska economy in the second half of 2014. Positive business expectations
are a key reason for the improvement in the LEI-N. Specifically, June respondents to the Survey
of Nebraska Business predict a strong increase in both sales and employment at their business
over the next six month. There also was a decline in initial unemployment claims and an
improvement in building permits during June. Along with these improving components, there
also was a modest decline in three LEI-N components. In particular, there was modest decline in
airline passenger counts and manufacturing hours during June. Further, for the first time in
several months, there was an increase in the value of the U.S. Dollar, which is negative for
Nebraska exporters.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in June 2014, compared
to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N rose
by 1.01% in June.
Figure 1: Change in LEI-N
June 2014
2.50%
1.25%
0.00%
Rapid Growth
1.01%
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 has risen in each of
the last five months, after volatility at the beginning of the year. The five consecutive months of increase
suggest that there will be solid growth in the Nebraska economy in the second half of 2014.
1
Figure 2: Change in LEI - N
Last 6 Months
2.50%
1.34%
1.01%
0.95%
1.25%
0.09%
0.01%
0.00%
-1.25%
-2.50%
-1.87%
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during June
2014. The change in the overall LEI–N is the weighted average of changes in each component (see page
5). During June, three of the six components of the LEI-N rose and two rose rapidly. Business
expectations were very positive in June as respondents to the Survey of Nebraska Business predicted a
strong increase in both sales and employment over the next six months. In the nearly three years that
the monthly survey has been taken, June was the second stronger month on record for business
expectations. There also was a solid decline in initial unemployment claims, a positive sign for the labor
market and a modest increase in single-family building permits. At the same time, there was a modest
decline in three other components, including airline passenger counts and manufacturing hours. The
slight increase in the value of the U.S. dollar 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
June 2014
2.50%
1.25%
0.59%
0.64%
0.11%
0.12%
-0.28%
-0.06%
Dollar Exchange
Rate
-1.25%
Airline Passengers
0.00%
-0.10%
Trend Adjustment
Business
Expectations
Manufacturing
Hours
Initial UI Claims
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 0.26% last month.
Figure 4: Change in CEI-N
June 2014
2.62%
1.31%
0.00%
Rapid Growth
Moderate Growth
0.26%
Moderate Decline
-1.31%
Rapid Decline
-2.62%
The increase in the CEI-N during June is the second consecutive monthly increase and is another sign of
stabilization in the Nebraska economy. Increases in May and June negate a decline in April of similar
magnitude. As seen in Figure 5, the CEI-N dropped during the first quarter of the year but was stable in
aggregate in the second quarter months of April through June. Note that the CEI-N is expected to
expand over the next 6 months (see Figure 7).
Figure 5: Change in CEI-N
Last 6 Months
2.62%
1.31%
0.47%
0.07%
0.26%
0.00%
-0.06%
-1.31%
-0.83%
-0.97%
-2.62%
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
As seen in Figure 6, three components of the CEI-N rose during June while one fell. There was growth in
real private wages, commodity prices and business conditions. Real weekly private wages rose during
the month, with solid growth in employment and weekly hours. Agricultural commodity prices also rose
due to solid increases in beef prices although corn prices fell during June. Respondents to the Survey of
Nebraska Business reported an increase in sales and employment in recent months. The electricity sales
component was the only CEI-N component to decline during June, after accounting for temperature and
other seasonal adjustments. However, limited irrigation activity during June may have played a role in
weak electricity sales. 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
June 2014
2.62%
1.31%
0.44%
0.51%
0.37%
0.00%
-1.31%
-1.06%
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 beginning in August. This expectation is consistent with recent values for the LEIN (see Figure 2). After declining in January, the LEI-N has improved for five consecutive months include
solid growth in February, April and June.
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
0.92%
1.25%
0.75%
109.00
0.30%
0.58%
0.32%
108.00
0.38%
0.25%
107.00
-0.25%
106.00
-0.22%
-0.75%
105.00
-1.25%
104.00
Jun 14
Jul 14
Aug 14
Sep 14
Index Gr owth
Oct 14
Nov 14
Dec 14
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
13.8539
3.5333
1.1943
10.3148
1.4786
4.5278
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Inverse
STD
0.0722
0.2830
0.8373
0.0969
0.6763
0.2209
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0330
0.1294
0.3829
0.0443
0.3093
0.1010
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.9143
1.6936
3.0859
3.8493
Inverse
STD
0.2035
0.5905
0.3241
0.2598
Weight
(Inverse STD
Standardize)
0.1477
0.4286
0.2352
0.1886
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between May and June 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
Current
Previous
Difference
Weight
SF Building Permits
57.42
53.67
3.75
0.03
0.12
0.11%
Airline Passengers
90.47
92.84
-2.37
0.13
-0.31
-0.28%
U.S. Dollar Exchange Rate
(Inverse)
101.91
102.09
-0.18
0.38
-0.07
-0.06%
Initial Unemployment
Insurance Claims (Inverse)
98.65
84.15
14.50
0.04
0.64
0.59%
Manufacturing Hours
94.05
94.40
-0.35
0.31
-0.11
-0.10%
Survey Business
Expectations 1
56.88
6.88
0.10
0.70
0.64%
0.13
0.12%
1.11
1.01%
Trend Adjustment
Total (weighted average)
1
110.53
109.42
Contribution
Percentage
Contribution
(Relative to
Previous LEI-N)
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
109.70
117.27
-7.57
0.15
-1.12
-1.06%
97.14
96.05
1.09
0.43
0.47
0.44%
147.61
145.96
1.65
0.24
0.39
0.37%
2.84
0.19
0.54
0.51%
0.27
0.26%
Private Wage
Agricultural Commodities
Survey Business Conditions
Total (weighted average)
1
1
52.84
105.59
105.32
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
80.00
CEI-N (May 2007=100)
LEI-N, 6 Month Forward (May 2007=100)
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