Nebraska Monthly Economic Indicators: October 19, 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) grew by just 0.09% during
September 2012. The increase in the LEI-N, which predicts economic growth in the state six
months in the future, was quite weak, but did follow two months of solid increase in July and
August. The continued expansion of the LEI-N, however slight, confirms that the Nebraska
economy will grow moderately at the end of 2012 and early 2013. A primary reason for the
slight improvement in the LEI-N was a solid increase in single-family building permits,
suggesting continued improvement in the Nebraska housing market. A declining U.S. dollar also
was a positive indicator, suggesting future growth in Nebraska export activity. But, other
components of the LEI-N declined during September. Airline passenger counts and
manufacturing hours both declined during the month. Initial unemployment claims rose in
Nebraska. Finally, respondents to the Survey of Nebraska Business indicated that both sales and
employment would decline moderstly in their business over the next sixth months.
Leading Economic Indicator – Nebraska
Figure 1 shows the change in the Leading Economic Indicator – Nebraska (LEI-N) in September 2012,
compared to the previous month. The LEI-N, which predicts economic growth six months into the
future, rose by just 0.09% in September.
Figure 1: Change in LEI-N
September 2012
2.58%
1.29%
Rapid Growth
Moderate Growth
0.09%
0.00%
Moderate Decline
-1.29%
Rapid Decline
-2.58%
Figure 2 shows the growth in the LEI-N over the last 6 months. The Figure shows that the leading
indicator grew solidly in July and August, before its slight improvement in September. This pattern
suggests that the Nebraska economy will grow moderately in late 2012 and early 2013. However, the
decline in LEI-N in both May and June suggests a weak economy over the next two months.
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Figure 2: Change in LEI - N
Last 6 Months
2.58%
1.29%
1.16%
0.75%
0.88%
0.09%
0.00%
-1.29%
-1.08%
-1.02%
May 12
Jun 12
-2.58%
Apr 12
Jul 12
Aug 12
Sep 12
Figure 3 shows the components of change in the Leading Economic Indicator – Nebraska during
September 2012. The change in the overall LEI – N is the weighted average of changes in each
component (see page 5). Only two components contributed to the increase in the LEI-N. The first was a
solid increase in single-family building permits. This increase indicates that Nebraska construction
activity will continue to improve. The second was a declining U.S. dollar, which will support growth of
Nebraska’s large export sector in the coming months. While the overall value of LEI-N rose slightly
during September, four components suggest a weaker economic outlook. The decline in airline
passenger counts indicates a decline in businesspeople traveling to support future business activity and
that households are cutting back on leisure travel. An increase in initial unemployment claims suggests
that employers expect to need fewer workers in the coming months. This interpretation is supported by
the respondents to the Survey of Nebraska Businesses. Respondents reported that they expect a modest
decline in sales and employment in their businesses over the next six months. Finally, the slight decline
in manufacturing hours indicates that manufacturing is no longer a strong engine of growth in the
Nebraska economy, as it has been much of the past year. Note that the trend adjustment component
pictured in Figure 3 is discussed on page 5.
Figure 3: LEI-N Components of Change
September 2012
2.58%
1.29%
0.64%
0.20%
0.13%
-0.15%
-0.05%
-0.14%
Manufacturing
Hours
Business
Expectations
-0.54%
-1.29%
Initial UI Claims
0.00%
Trend Adjustment
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 grew moderately, by 0.60%, between August and September of
2012.
Figure 4: Change in CEI -N
September 2012
2.84%
1.42%
0.00%
Rapid Growth
Moderate Growth
0.60%
Moderate Decline
-1.42%
Rapid Decline
-2.84%
As seen in Figure 5, the increase in the CEI-N during September reversed a decline in August. Taking
August and September together, growth has sputtered in Nebraska in recent months after a period of
solid growth, especially in June and July.
Figure 5: Change in CEI -N
Last 6 Months
2.86%
1.43%
1.05%
1.01%
0.81%
0.60%
0.00%
-0.36%
-0.52%
-1.43%
-2.86%
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
As seen in Figure 6, growth in private wages was the primary reason for the improvement in the CEI-N
during September. Real (inflation adjusted) private wages grew during September, reflecting moderate
employment growth and rising real hourly wages in a lower inflation environment. Agricultural
commodity prices also rose in September, due to an increase in beef prices. This increase in price will
help mitigate the economic costs of the drought during the current year. There was weakness in other
components of the CEI-N, however, as would be expected in the current weak economic environment.
Weather adjusted electricity sales fell in September compared to August. Finally, respondents to the
Survey of Nebraska Business reported a decline in sales and employment activity in recent months. A
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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.
Figure 6: CEI-N Components of Change
September 2012
2.86%
1.24%
1.43%
0.47%
0.00%
-1.43%
-0.42%
-0.69%
Business
Conditions
Agricultural
Commodities
Private Wages
Electricity Sales
-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 April and September of 2012 (see Figure 2). Recall that the LEI-N declined during
May and June but then rose solidly in July and August, and rose slightly in September. This pattern
suggests continued weakness in the Nebraska economy over the next few months before moderate
economic growth returns during late 2012 and early 2013. These expectations are depicted in Figure 7.
During October and November, the CEI-N will decline slightly. The CEI-N is then expected to rise from
December 2012 through March 2013.
Figure 7: 6-Month Forecast of
Coincident Economic Indicator - Nebraska
1.00%
115.00
0.41%
0.50%
0.57%
114.50
0.23%
0.17%
0.00%
-0.50%
114.00
113.50
-0.15% -0.22%
113.00
112.50
-1.00%
112.00
Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13
Index Growth
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
14.3982
3.6810
1.2553
9.9498
1.4577
8.8351
Inverse
STD
0.0695
0.2717
0.7966
0.1005
0.6860
0.1132
Coincident Economic Indicator - Nebraska
Weight
(Inverse STD
Standardize)
0.0341
0.1333
0.3910
0.0493
0.3367
0.0556
Variable
Electricity Sales
Private Wages
Agricultural Commodities
Survey Business Conditions
Standard
Deviation
4.8582
1.8117
3.3142
8.2757
Inverse
STD
0.2058
0.5520
0.3017
0.1208
Weight
(Inverse STD
Standardize)
0.1744
0.4676
0.2556
0.1024
Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between August and September.
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.
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
65.69
59.75
5.94
0.03
0.20
0.20%
Airline Passengers
90.91
95.02
-4.11
0.13
-0.55
-0.54%
U.S. Dollar Exchange Rate
(Inverse)
105.40
103.74
1.66
0.39
0.65
0.64%
Initial Unemployment
Insurance Claims (Inverse)
60.68
63.68
-3.00
0.05
-0.15
-0.15%
Manufacturing Hours
86.92
87.06
-0.14
0.34
-0.05
-0.05%
Survey Business
Expectations 1
47.36
-2.64
0.06
-0.15
-0.14%
0.13
0.13%
0.09
0.09%
Trend Adjustment
Total (weighted average)
1
101.92
101.83
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
107.59
112.06
-4.47
0.17
-0.78
-0.69%
95.79
92.80
2.99
0.47
1.40
1.24%
151.90
149.82
2.08
0.26
0.53
0.47%
-4.61
0.10
-0.47
-0.42%
0.68
0.60%
Private Wage
Agricultural Commodities
Survey Business Conditions 1
Total (weighted average)
1
45.39
113.58
112.90
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)
2013.1
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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