Tracking and Anticipating
Singapore’s Growth Cycles
International Seminar on Early Warning and
Business Cycle Indicators
15 December 2009
Outline

Singapore’s Composite Leading Index (CLI)

CLI Components and Compilation

Performance of CLI

Does CLI Provide Early Warning?
Singapore’s Composite Leading Index
(CLI)
Singapore’s Composite Leading Index

Established in the aftermath of the 1985 recession with the
help of the Centre for International Business Cycle Research at
Columbia University

Reviewed and revised in 2004 to ensure its continuing
relevance and enhance its ability to anticipate growth cycle
fluctuations
Classical Cycles and Growth Cycles

Classical Cycles
Expansions and contractions in the levels of aggregate
economic activity

Growth Cycles
Deviations from the long-term trend growth rate of the
economy – “deviation cycles”
More relevant for economies exhibiting long upward trend
like Singapore
CLI Components and Compilation
Selection Criteria for CLI Components

Economic Significance
Express early sentiment and expectations of economic agents
Measure activity during early stages of production

Cyclical Behaviour
Cycles consistently lead cycles of reference series
No missing or extra cycles
Leads at turning points are relatively homogeneous

Timeliness and Periodicity
Monthly series preferred to quarterly series
Components of the CLI
1)
Total New Companies Formed
2)
Business Expectations of Wholesale Trade, Qtrly
3)
Business Expectations of Stock of Finished Goods (Mfg), Qtrly
4)
Money Supply (M2)
5)
Stock Exchange of Singapore Indices
6)
US Purchasing Managers’ Index
7)
Domestic Liquidity Index
8)
Non-Oil Retained Imports
9)
Total Non-Oil Seaborne Cargo Handled
CLI Compilation Method

Adopted The Conference Board’s (TCB) approach





Compute month-on-month changes for each component
Adjust month-on-month changes to equalise volatility of each
component
Sum the components’ adjusted month-to-month changes for
each month to obtain the growth rate of CLI
Level of the index is computed using the symmetric percent
change formula
With some differences


Quarterly components (i.e. Business Expectations) are
interpolated into monthly data using cubic spline
CLI growth rates are not adjusted to equate their trends to the
Composite Coincident Index
Methodology to Identify
CLI Turning Points

Step 1: Obtain six-month smoothed annualised rate (SMMAR)

Step 2: Identify Turning Points
Bry-Boschan (1971) algorithm is used to estimate the peak and
trough of CLI SMMAR
Performance of the CLI
CLI Reference Series: CCI

Singapore’s Composite Coincident Index (CCI), which
encompasses a broad spectrum of economic activities, is used
as the basis for identifying Singapore’s growth cycles

Singapore’s CCI was developed in 1986 and reviewed in 2004.
As with CLI, it was developed and updated using TCB’s
approach
Methodology to Identify
CCI Growth Cycles

Step 1: Trend Estimation
Phase-Average Trend (PAT) method developed by NBER to
separate long-term trend from shorter-term cycles so that
underlying cyclical fluctuations are more prominent
Previously used by OECD. OECD switched to HodrickPrescott (HP) Filter in late-2008. We are presently assessing
the possibility of using HP Filter.

Step 2: Identify Turning Points
Bry-Boschan (1971) algorithm to estimate the peak and
trough dates in “detrended series”
Historical Performance of CLI
in Predicting Growth Cycles
CLI SMMAR leads historical growth cycles

Identified Grow th Recessions
Per Cent
6-m onth sm oothed annualised rate of CLI
20
-15
15
0
10
-2
5
Sep-03
May-03
Jan-03
Sep-02
-2
-10
-15
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
Jan-98
Sep-97
May-97
-5
Jan-97
0
-7
Jul 97-Nov 98
Asian Financial Crisis
Downturn in global
electronics cycle
-3
Aug 00-Oct 01
Global economic downturn
Severe downturn in global
electronics cycle
Apr 02-Apr 03
Broad-based weakness
in domestic economy
Historical Performance of CLI
in Predicting Classical Cycles

Classical Cycles can be identified by applying Bry-Boschan
(1971) algorithm to identify the turning points in CCI

CLI leads historical classical cycles
Identified Classical Recessions
Index
CLI
110
105
-12
0
100
95
-4
-2
90
-3
85
-6
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
Jan-98
Sep-97
May-97
Jan-97
80
Does CLI
Provide Early Warning?
Does CLI Provide Early Warning?

Singapore experienced 4 consecutive quarters of negative
quarter-on-quarter growth from 2Q08 to 1Q09

How did CLI perform as a early warning system during that
period?
Does CLI Provide Early Warning?
Index
Per cent
20
130
Jun 07 peak in
CLI SMMAR
15
Sep 08 collapse of
Lehman Brothers
10
125
120
5
0
115
-5
CLI SMMAR
CLI
-10
110
Technical recession
105
-15
Oct 07 peak in
CLI
Dec 08 troughs in CLI
SMMAR and CLI
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
100
Jan-07
-20
Does CLI Provide Early Warning?
Index
130
Oct 07 peak in
CLI
Sep 08 collapse of
Lehman Brothers
125
120
4Q07 growth
6.0%
115
2Q08 growth
1.9%
3Q08 growth 0.5%
1Q08 growth
7.2%
110
105
Forecast 5.6%
Forecast 4.2%
Forecast 5.5%
Forecast 2.2%
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
100
Does CLI Provide Early Warning?

Yes, the CLI does provide early warning, turning down
before the onset of a recession and up before recovery.

However, most analysts and commentators at the time were
sceptical that the economy was about to turn projecting a
continuation of the then prevailing trend.

Compilers may need to do more to report on and draw
attention to the CLIs

Users will need to have the discipline to pay attention to the
CLIs, particularly when they are or seem to be signalling the
possible onset of turning points
References
Bry, G., and C. Boschan, 1971. Cyclical Analysis of Time Series: Selected
Procedures and Computer Programs. New York: NBER.
OECD, 2008. Upcoming changes to the OECD Composite Leading
Indicators to be implemented in the December 2008 MEI. Available at:
http://www.oecd.org/dataoecd/46/61/41635628.pdf
[Accessed 4 November 2009]