Nebraska Monthly Economic Indicators: November 16, 2012
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) dropped slightly, declining by
0.06%, during October 2012. The decline in the LEI-N, which predicts economic growth in the
state six months in the future, followed three months of increase. The slight decline in the LEI-N
is not sufficient to reverse the trend seen in the previous three months, and the Nebraska
economy is expected to expand slowly in November and December followed by moderate
growth in the first half of 2013. Looking at individual components of the LEI-N, there was a
decline in three of the six components. Single-family building permits declined in October after
several months of improvement. Further, there was a decline in manufacturing hours. Finally,
respondents to the Survey of Nebraska Business reported a decline in business expectations for
sales and employment. Other indicator components improved during October. Seasonally
adjusted airline pasenger counts were higher. Seasonally adjusted initial unemployment claims
and the dollar exchange rate both fell in October, suggesting improvement in the Nebraska’s
labor market and improved prospects for exports.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in October 2012,
compared to the previous month. The LEI-N, which predicts economic growth six months into the
future, declined by 0.06% in October.
Figure 1: Change in LEI-N
October 2012
2.54%
1.27%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.06%
-1.27%
Rapid Decline
-2.54%
Figure 2 shows the growth in the LEI-N over the last 6 months. The figure shows that the leading
indicator grew solidly from July through September, after declining in May and June. This pattern
suggests that the Nebraska economy will have limited growth, if any, in the next few months but the
rate of growth will accelerate in January of 2013.
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Figure 2: Change in LEI - N
Last 6 Months
2.58%
1.36%
1.21%
1.29%
0.65%
0.00%
-0.06%
-1.29%
-1.00%
-0.99%
May 12
Jun 12
-2.58%
Jul 12
Aug 12
Sep 12
Oct 12
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during October
2012. The change in the overall LEI – N is the weighted average of changes in each component (see page
5). Three of the six components contributed to the increase in the LEI-N. The first was an increase in
seasonally adjusted airline passenger counts, an indicator of future business activity and consumer
confidence. The second was a decline in initial unemployment claims, which is a sign of an improving
labor market. The third was a declining U.S. dollar, which will support growth of Nebraska’s large export
sector in the coming months. Three indicator components declined during October, including
manufacturing hours. Single-family building permits also declined during October, after several months
of increase. There also was a decline in business expectations. In particular, respondents to the Survey of
Nebraska Businesses reported that they expect a modest decline in sales and employment in their
businesses over the next six months. Finally, note that the trend adjustment component pictured in
Figure 3 is discussed on page 5.
Figure 3: LEI-N Components of Change
October 2012
2.58%
1.29%
0.13%
0.13%
0.18%
0.13%
-0.43%
-0.10%
-0.10%
Business
Expectations
-1.29%
Manufacturing
Hours
0.00%
Trend Adjustment
Initial UI Claims
Dollar Exchange
Rate
Airline Passengers
Building Permits
-2.58%
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 declined by 0.98%, between September and October of 2012.
Figure 4: Change in CEI-N
October 2012
2.84%
1.42%
0.00%
Rapid Growth
Moderate Growth
Moderate Decline
-0.98%
-1.42%
Rapid Decline
-2.84%
As seen in Figure 5, the decline in the CEI-N during October suggests a slowdown in the Nebraska
economy during the fall. After expanding overall during the summer months of June through August, the
CEI-N has not increased in the fall. In particular, the increase in September was smaller than the decline
in October. The decline in October CEI-N was predicted by the decline in the LEI-N in May 2012.
Figure 5: Change in CEI-N
Last 6 Months
2.86%
1.04%
1.43%
0.79%
0.59%
0.00%
-0.11%
-0.38%
-0.98%
-1.43%
-2.86%
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
As seen in Figure 6, private wages, electricity sales, and business conditions all contributed to the
decline in the CEI-N. Real (inflation adjusted) private wages declined during October, reflecting
moderate employment growth but a decline in weekly hours worked and real hourly wages. Weather
adjusted electricity sales also declined in October relative to September. Further, respondents to the
Survey of Nebraska Business reported a decline in sales and employment activity in recent months. Only
one component, agricultural commodity prices, rose in October. This increase in prices will help mitigate
the economic costs of the 2012 drought. 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
October 2012
2.86%
0.86%
1.43%
0.00%
-1.43%
-0.54%
-0.47%
-0.83%
Agricultural
Commodities
Private Wages
Electricity Sales
Business
Conditions
-2.86%
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 May and October of 2012 (see Figure 2). Recall that the LEI-N declined during
May and June but then rose solidly from July through September and declined only slightly in October.
This pattern suggests weak growth, if any, in the Nebraska economy for the rest of the year but solid in
the first half of 2013. These expectations are depicted in Figure 7. The CEI-N is expected to manage a
slight increase during November and December and growth will accelerate in January 2012. Growth in
the CEI-N will be sustained through April 2013.
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
0.84%
1.00%
116.00
0.39%
0.50%
0.17%
0.29%
115.00
0.19%
0.15%
114.00
0.00%
113.00
-0.50%
112.00
-1.00%
111.00
Oct-12
Nov-12
Dec- 12
Jan-13
Index Growth
Feb-13 Mar- 13
Index Value
Apr-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
14.4058
3.6698
1.2503
9.9228
1.4398
8.8351
Variable
SF Housing Permits
Airline Passengers
Exchange Rate
Initial UI Claims
Manufacturing Hours
Survey Business Expectations
Inverse
STD
0.0694
0.2725
0.7998
0.1008
0.6945
0.1132
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0339
0.1329
0.3901
0.0492
0.3388
0.0552
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8511
1.8382
3.3101
8.2757
Inverse
STD
0.2061
0.5440
0.3021
0.1208
Weight
(Inverse STD
Standardize)
0.1757
0.4637
0.2575
0.1030
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between September and October.
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. There is also a trend adjustment factor for the U.S. Leading Economic Indicator.
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
54.64
67.78
-13.13
0.03
-0.44
-0.43%
Airline Passengers
91.91
90.91
1.00
0.13
0.13
0.13%
U.S. Dollar Exchange Rate
(Inverse)
105.70
105.34
0.36
0.39
0.14
0.13%
Initial Unemployment
Insurance Claims (Inverse)
64.44
60.68
3.76
0.05
0.18
0.18%
Manufacturing Hours
89.94
90.23
-0.29
0.34
-0.10
-0.10%
Survey Business
Expectations 1
48.06
-1.94
0.06
-0.11
-0.10%
Component
Trend Adjustment
Total (weighted average)
1
103.02
103.08
0.13
0.13%
-0.06
-0.06%
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
103.23
106.72
-3.49
0.18
-0.61
-0.54%
94.42
96.46
-2.04
0.46
-0.95
-0.83%
155.76
151.95
3.81
0.26
0.98
0.86%
-5.18
0.10
-0.53
-0.47%
-1.11
-0.98%
Private Wage
Agricultural Commodities
Survey Business Conditions
Total (weighted average)
1
1
44.82
112.79
113.91
Survey results are a diffusion Index, which is always compared to 50
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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.
Figure 9: 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
CEI-N (May 2007=100)
2013.4
2013.1
2012.7
2012.10
2012.4
2012.1
2011.7
2011.10
2011.4
2011.1
2010.7
2010.10
2010.4
2010.1
2009.7
2009.10
2009.4
2009.1
2008.7
2008.10
2008.4
2008.1
2007.1
2007.7
2007.4
2007.1
2006.7
2006.10
2006.4
2006.1
2005.1
2005.7
2005.4
2005.1
2004.7
2004.10
2004.4
2004.1
2003.1
2003.7
2003.4
2003.1
2002.7
2002.10
2002.4
2002.1
2001.1
2001.7
2001.4
2001.1
80.00
LEI-N, 6 Month Forward (May 2007=100)
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