Nebraska Monthly Economic Indicators: October 24, 2018 Prepared by the UNL College of Business, Bureau of Business Research Author: Dr. Eric Thompson 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) 1 fell by 0.35% during September of 2018. The decline in the LEI-N, which is designed to predict economic activity six months into the future, suggests that Nebraska economic growth will slow in the coming months. Initial claims for unemployment insurance rose in Nebraska during September, while building permits for singlefamily and airline passenger counts both declined. Business expectations were a bright spot for the Nebraska economy. Respondents to the September Survey of Nebraska Business reported plans to increase both sales and employment at their businesses over the next six months. Manufacturing hours-worked also rose during September. Leading Economic Indicator Nebraska Figure 1 shows the change in the Leading Economic Indicator Nebraska (LEI-N) during compared to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N fell by 0.35% in September. Figure 1: Change in LEI-N 2.40% 1.20% -2.40% Rapid Growth Moderate Growth Moderate Decline Rapid Decline -0.35% Figure 2 shows the change in the LEI-N over the last six months. The leading indicator grew modestly from April through August before declining in September. Modest improvements in the indicator suggest that the rate of economic growth will be modest in the coming months. 1 The author would like to thank Dr. William Walstad for helping to design the LEI-N. 1
Building Permits Airline Passengers Dollar Exchange Rate Initial UI Claims Manufacturing Hours Business Expectations Trend Adjustment 2.40% Figure 2: Change in LEI - N Last 6 Months 1.20% 0.69% 0.28% 0.24% 0.27% 0.75% -0.35% -2.40% Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Figure 3 shows the components of change in the Leading Economic Indicator Nebraska during. The change in the overall LEI N is the weighted average of changes in each component (see page 5). Four of six LEI-N components fell during September. Airline passenger counts and building permits for single-family homes both declined during the month. Initial claims for unemployment rose, suggesting some softening in the robust Nebraska labor market. The value of the U.S. dollar also rose, creating additional competitive pressure on Nebraska exporters. Manufacturing hours were a bright spot for the Nebraska economy, rising during September. Business expectations also were a positive. Respondents to the September Survey of Nebraska Business reported plans to increase both sales and employment at their businesses over the next six months. Note that the trend adjustment component pictured in Figure 3 is discussed on page 5. 2.40% Figure 3: LEI-N Components of Change 1.20% -0.06% -0.13% -0.12% -0.70% 0.22% 0.35% 0.09% -2.40% 2
Coincident Economic Indicator Nebraska The Coincident Economic Indicator - Nebraska (CEI-N) is a measure of the current size of the Nebraska economy. The CEI-N rose by a rapid 2.55% during September of 2018, as seen in Figure 4. 2.56% Figure 4: Change in CEI-N Rapid Growth 2.55% 1.28% -1.28% Moderate Growth Moderate Decline Rapid Decline -2.56% Figure 5 shows the change in the CEI-N over the last 6 months. The CEI-N has risen five of the last six months. The sharp increase during September indicates that economic growth is currently very strong in Nebraska. Figure 5: Change in CEI-N Last 6 Months 2.56% 2.55% 1.28% 0.17% 0.54% 0.53% 0.18% -1.28% -1.04% -2.56% Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Three of four CEI-N components rose during September. Private wages rose quickly, reflecting an increase in real hourly wages as well as employment and weekly hours-worked. Business conditions also were positive with respondents to the September Survey of Nebraska Business reporting an increase in both sales and employment during recent months. There was an increase in electricity sales on a seasonallyadjusted basis, and a slight decline in agricultural commodity prices. 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
Electricity Sales Private Wages Agricultural Commodities Business Conditions 2.56% 1.28% -1.28% Figure 6: CEI-N Components of Change 0.39% 1.22% -0.03% 0.98% -2.56% Figure 7 shows the forecast for the CEI-N over the next six months. Economic growth is expected to continue in Nebraska but the rate of growth will drop during 2019. Forecast growth in the CEI-N is consistent with changes in the LEI-N over the last six months (Figure 2). 1.30% 0.80% 0.30% -0.20% -0.70% -1.70% Figure 7: 6-Month Forecast of Coincident Economic Indicator - Nebraska -0.14% 0.25% 0.37% 0.32% 0.16% 0.05% Sep 18 Oct 18 Nov 18 Dec 18 Jan 19 Feb 19 Mar 19 Index Growth Index Value 130.50 130.00 129.50 129.00 128.50 128.00 127.50 4
Weights and Component Shares Table 1 shows the weights 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 with significant month-to-month fluctuations. Leading Economic Indicator - Nebraska Table 1: Component Weights for LEI-N and CEI-N Weight (Inverse STD Standardize) Coincident Economic Indicator - Nebraska Weight (Inverse STD Standardize) Variable Standard Deviation Inverse STD Variable Standard Deviation Inverse STD SF Housing Permits 13.3131 0.0751 0.0352 Electricity Sales 4.5597 0.2193 0.1622 Airline Passengers 3.2891 0.3040 0.1423 Private Wages 1.7719 0.5644 0.4173 Exchange Rate 1.1965 0.8358 0.3912 Agricultural Commodities 3.2977 0.3032 0.2242 Initial UI Claims 10.8851 0.0919 0.0430 Survey Business Conditions 3.7679 0.2654 0.1963 Manufacturing Hours 1.6822 0.5945 0.2783 Survey Business Expectations 4.2522 0.2352 0.1101 Tables 2 and 3 show the calculation for the change in LEI-N and CEI-N between August and September of 2018. 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 0.09% per month. The U.S. Leading Economic Indicator also has a trend adjustment. Table 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 Contribution Percentage Contribution (Relative to Previous LEI-N) SF Building Permits 64.74 67.10-2.36 0.04-0.08-0.06% Airline Passengers 113.06 114.40-1.34 0.14-0.19-0.13% U.S. Dollar Exchange Rate (Inverse) 82.95 83.41-0.47 0.39-0.18-0.12% Initial Unemployment Insurance Claims (Inverse) 142.30 166.55-24.25 0.04-1.04-0.70% Manufacturing Hours 97.05 95.88 1.17 0.28 0.33 0.22% Survey Business Expectations 1 54.68 4.68 0.11 0.52 0.35% Trend Adjustment 0.13 0.09% Total (weighted average) 148.35 148.88-0.53-0.35% 1 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 188.04 185.06 2.98 0.16 0.48 0.39% Private Wage 115.25 111.58 3.67 0.42 1.53 1.22% Agricultural Commodities 114.04 114.23-0.19 0.22-0.04-0.03% Survey Business Conditions 1 56.27 6.27 0.20 1.23 0.98% Total (weighted average) 128.66 125.46 3.20 2.55% 1 Survey results are a diffusion Index, which is always compared to 50 5
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 2013.1 2013.5 2013.9 2014.1 2014.5 2014.9 2015.1 2015.5 2015.9 2016.1 2016.5 2016.9 2017.1 2017.5 2017.9 2018.1 2018.5 2018.9 2019.01 2001.1 2001.7 2002.1 2002.7 2003.1 2003.7 2004.1 2004.7 2005.1 2005.7 2006.1 2006.7 2007.1 2007.7 2008.1 2008.7 2009.1 2009.7 2010.1 2010.7 2011.1 2011.7 2012.1 2012.7 2013.1 2013.7 2014.1 2014.7 2015.1 2015.7 2016.1 2016.7 2017.1 2017.7 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 2017. 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 0.95. 130.00 125.00 120.00 115.00 110.00 105.00 100.00 95.00 90.00 85.00 80.00 Figure 8: Coincident Economic Indicator - Nebraska Comparison with Nebraska Real Quarterly GDP 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 0.92. Figure 9: 6-Month Forward Value of Leading Economic Indicator - Nebraska Comparison with Coincident Economic Indicator - Nebraska 150.00 140.00 130.00 120.00 110.00 100.00 90.00 80.00 CEI-N (May 2007=100) LEI-N, 6 Month Forward (May 2007=100) 6