Nebraska Monthly Economic Indicators: January 18, 2013
Prepared by the UNL College of Business Administration, Department of Economics
Authors: Dr. Eric Thompson, Dr. William Walstad
Graduate Research Assistant: Adam George
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 modestly, by 0.11%, during
December 2012. The increase in the LEI-N, which predicts economic growth in the state six
months in the future, suggests modest economic growth in Nebraska in mid-2013.
Looking at individual components of the LEI-N, two components improved in December. The
value of the U.S.dollar fell during December, which may increase export activity over the next six
months. There also was a decline in initial unemployment claims during the month that signals
an improving labor market. Among other components, there was a modest decline in
manufacturing hours, airline passenger counts, and building permits during December. Further,
there was a significant decline in business expectations. Respondents to the Survey of Nebraska
Business reported negative expectations for business sales and employment over the next six
months. These negative expectations may have reflected concerns regarding stalled fiscal cliff
negotiations during much of December. It will be interesting to monitor whether business
expectations improve during January.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in December 2012,
compared to the previous month. The LEI-N, which predicts economic growth six months into the
future, rose by 0.11% in December.
Figure 1: Change in LEI-N
December 2012
2.52%
1.26%
Rapid Growth
Moderate Growth
0.11%
0.00%
Moderate Decline
-1.26%
Rapid Decline
-2.52%
1
Figure 2 shows the growth in the LEI-N over the last 6 months. The figure shows that the leading
indicator grew from solidly July through September, but growth was mixed over the last three months.
This pattern suggests that the Nebraska economy will grow solidly during the first three months of 2013
but growth will be limited from April through June.
Figure 2: Change in LEI - N
Last 6 Months
2.52%
1.26%
1.10%
1.37%
0.70%
0.66%
0.11%
0.00%
-0.66%
-1.26%
-2.52%
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during
December 2012. The change in the overall LEI – N is the weighted average of changes in each
component (see page 5). Two components contributed to the increase in the LEI-N. There was decrease
in the value of the U.S. dollar during December, which may increase export activity in the state. Further,
initial unemployment claims declined during the month. A decline in layoffs suggests that a growing
share of employers expect to maintain their workforce in the months to come. All other components
declined during the month. There was a modest decrease in seasonally adjusted airline passenger
counts as well as a slight decline in manufacturing hours. Single-family building permits pulled back
modestly in December after a sharp increase in November. Finally, there was a significant decline in
business expectations. Respondents to the Survey of Nebraska Businesses reported that they expect a
sharp decline in sales and a modest decline in employment in their business over the next six months.
Business concerns over fiscal cliff negotiations may have harmed business confidence during December.
Finally, note that the trend adjustment component pictured in Figure 3 is discussed on page 5.
Figure 3: LEI-N Components of Change
December 2012
2.52%
1.26%
0.23%
0.38%
0.13%
-0.07%
-0.36%
Business
Expectations
-0.04%
Manufacturing
Hours
-0.16%
Airline Passengers
-1.26%
Building Permits
0.00%
Trend Adjustment
Initial UI Claims
Dollar Exchange
Rate
-2.52%
2
Coincident Economic Indicator – Nebraska
The Coincident Economic Indicator - Nebraska (CEI-N) is a measure of the current size of the Nebraska
economy. In Figure 4, the CEI-N rose solidly, by 0.92%, between November and December of 2012.
Figure 4: Change in CEI-N
December 2012
2.84%
1.42%
0.00%
Rapid Growth
0.92%
Moderate Growth
Moderate Decline
-1.42%
Rapid Decline
-2.84%
As seen in Figure 5, the solid growth in the CEI-N during December represents as acceleration in the
Nebraska economy late in 2012, after months of uneven growth. Note that the improvement in the
December CEI-N was predicted by growth in the LEI-N in July 2012 (see Figure 2).
Figure 5: Change in CEI-N
Last 6 Months
2.84%
1.42%
0.74%
0.92%
0.22%
0.20%
0.00%
-0.33%
-1.42%
-1.72%
-2.84%
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
As seen in Figure 6, a strong increase in private wages underpinned the solid improvement in the CEI-N
during December. The improvement in private wages reflected an expansion in employment, hours, and
real hourly wages. Higher prices for agricultural commodities also contributed to growth in the CEI-N
during December. Among remaining components, electricity sales and business conditions contributed
to the decline in the CEI-N. Weather adjusted electricity sales declined in December relative to
November. Respondents to the Survey of Nebraska Business also reported a decline in sales and
employment activity in recent months. A detailed discussion of the components of the CEI-N, as well as
the 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
December 2012
2.84%
1.08%
1.42%
0.38%
0.00%
-1.42%
-0.13%
-0.41%
Business
Conditions
Agricultural
Commodities
Private
Wages
Electricity
Sales
-2.84%
Figure 7 shows the forecast for the CEI-N over the next six months. The forecast reflects changes in the
value of LEI-N between July and December of 2012 (see Figure 2). Recall that the LEI-N grew solidly
during the third quarter of 2012 but growth was limited during the last three months of 2012. This
pattern suggests the Nebraska economy should grow solidly but then the pace of growth will decline.
These expectations are depicted in Figure 7. The CEI-N is forecast to achieve solid growth during the
January through March 2013 period but growth will be limited from April through June of 2013.
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
1.00%
114.00
0.65%
0.41%
0.50%
0.24%
0.06%
0.24%
113.00
0.02%
0.00%
112.00
-0.50%
111.00
-1.00%
110.00
Dec 12
Jan 13
Feb 13 Mar 13
Index Growth
Apr 13 May 13
Index Value
Jun 13
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
14.3511
3.6482
1.2443
9.9779
1.4376
5.8116
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Inverse
STD
0.0697
0.2741
0.8037
0.1002
0.6956
0.1721
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0329
0.1296
0.3799
0.0474
0.3288
0.0813
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.6821
1.7832
3.3157
5.2709
Inverse
STD
0.2136
0.5608
0.3016
0.1897
Weight
(Inverse STD
Standardize)
0.1687
0.4431
0.2383
0.1499
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between November and
December. 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 0.13% per month. The U.S. Leading Economic Indicator also has a trend adjacent factor.
Table 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
68.48
73.57
-5.08
0.03
-0.17
-0.16%
Airline Passengers
90.07
90.41
-0.34
0.13
-0.04
-0.04%
U.S. Dollar Exchange Rate
(Inverse)
105.61
104.98
0.63
0.38
0.24
0.23%
Initial Unemployment
Insurance Claims (Inverse)
73.46
65.05
8.41
0.05
0.40
0.38%
Manufacturing Hours
90.08
90.29
-0.21
0.33
-0.07
-0.07%
Survey Business
Expectations 1
45.37
-4.63
0.08
-0.38
-0.36%
0.13
0.13%
0.11
0.11%
Component
Trend Adjustment
Total (weighted average)
1
103.69
103.58
Survey results are a diffusion Index, which is always compared to 50
Table 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
101.43
102.26
-0.83
0.17
-0.14
-0.13%
96.02
93.33
2.69
0.44
1.19
1.08%
157.25
155.47
1.78
0.24
0.43
0.38%
-3.06
0.15
-0.46
-0.41%
1.02
0.92%
Private Wage
Agricultural Commodities
Survey Business Conditions
Total (weighted average)
1
1
46.94
111.61
110.59
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 2011. The comparison ends in 2011
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 0.94.
Figure 8: 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
80.00
CEI-N (May 2007=100)
Real GDP (May 2007=100)
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
80.00
CEI-N (May 2007=100)
LEI-N, 6 Month Forward (May 2007=100)
6