Nebraska Monthly Economic Indicators: August 15, 2014 Prepared by the UNL College of Business Administration, Department of Economics Authors: Dr. Eric Thompson, Dr. William Walstad Graduate Research Assistants: Shannon McClure 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) fell by.75% during. The decline in the LEI-N, which predicts economic growth in the state six months in the future, is the first in six months. The decline suggests that economic growth may slow in Nebraska in early 2015 after strong growth in the second half of 2014. Three components contributed to the decline in the leading economic indicator in July. There was a decline in manufacturing hours and in single-family building permits during the month. There also was an increase in initial claims for unemployment insurance during July, a negative for the job market. Among positive components, business expectations remained positive in Nebraska for the sixth consecutive month. In particular, July respondents to the Survey of Nebraska Business predicted an increase in both sales and employment at their business over the next six month. There also was a modest decline in the value of the U.S. dollar during July, which is a positive for exporters. Leading Economic Indicator Nebraska Figure 1 shows the change in the Leading Economic Indicator Nebraska (LEI-N) in, compared to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N declined by 0.75% in July. 2.50% Figure 1: Change in LEI-N Rapid Growth Moderate Growth Moderate Decline -2.50% Rapid Decline Figure 2 shows the change in the LEI-N over the last 6 months. The leading indicator rose for five consecutive months before declining in July. The five consecutive months of increase suggest that there will be strong growth in the Nebraska economy in the second half of 2014. The decline in July suggests that the rate of growth may slow as 2015 begins. It will be important to monitor value of the LEI-N over the next few months to see if it continues to suggest slowing economic growth in early 2015. 1
Building Permits Airline Passengers Dollar Exchange Rate Initial UI Claims Manufacturing Hours Business Expectations Trend Adjustment 2.50% 0.95% Figure 2: Change in LEI - N Last 6 Months 0.14% 1.24% 0.10% 2.15% -2.50% Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Figure 3 shows the components of change in the Leading Economic Indicator Nebraska during July 2014. The change in the overall LEI N is the weighted average of changes in each component (see page 5). During July, three of the six components of the LEI-N fell. There was a decline in single-family building permits in Nebraska during July. There also was a modest decline in manufacturing hours in July following strong growth in both May and June. There was an increase in initial claims for unemployment insurance during July, indicating that the Nebraska labor market continues to face challenges. Among positive components, business expectations were positive in July as respondents to the Survey of Nebraska Business predicted an increase in both sales and employment over the next six months. Business expectations, however, moderated relative to strong growth expectations in June. The airline passenger count component was positive in July. The small decline in the U.S. dollar during July is a positive for Nebraska exporters. Note that the trend adjustment component pictured in Figure 3 is discussed on page 5. Figure 3: LEI-N Components of Change 2.50% 0.12% 0.09% 0.34% 0.12% -2.50% -0.35% -0.90% -0.16% 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 rose by 0.09% last month. 2.62% Figure 4: Change in CEI-N Rapid Growth 1.31% -1.31% -2.62% Moderate Growth Moderate Decline Rapid Decline 0.09% There also was an upward revision for CEI-N growth during June, due to an upward adjustment in data for both manufacturing hours and electricity sales during the month. As seen in Figure 5, economic growth improved in Nebraska in the second quarter of 2014, after weakness during the first quarter. The CEI-N grew solidly in May and strongly in June of 2014. Net growth during the April to June quarter also was solidly positive. Growth is expected to improve further in the third and fourth quarters of 2014 (see Figure 7). 2.62% Figure 5: Change in CEI-N Last 6 Months 1.31% 0.09% 0.46% 1.20% 0.09% -0.01% -1.31% -2.62% Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 As seen in Figure 6, two components of the CEI-N rose during July while two fell. Agricultural commodity prices rose during July due to solid increases in beef prices during the month, although corn prices fell. Business conditions were a modest positive as respondents to the Survey of Nebraska Business reported an increase in employment in recent months. However, electricity sales were a slight negative during July, after adjusting for weather and other seasonal factors. There also was a decline in private wages during July due to lower real hourly wages. 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 2.62% Figure 6: CEI-N Components of Change 1.31% -1.31% -0.03% -0.22% 0.25% 0.08% -2.62% Figure 7 shows the forecast for the CEI-N over the next six months. The forecast suggests solid growth in the Nebraska economy during the third quarter, due to strong growth in August. Even stronger growth is expected during the fourth quarter, with the Nebraska economy growing in October, November and December. A slight decline in the CEI-N is anticipated for January 2015. These expectations are consistent with recent values for the LEI-N (see Figure 2). 0.75% 0.25% Figure 7: 6-Month Forecast of Coincident Economic Indicator - Nebraska 1.07% 0.89% 0.51% 0.37% 110.00 109.00 108.00-0.25% -0.02% -0.06% 107.00 106.00 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 105.00 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. 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 13.8447 0.0722 0.0331 Electricity Sales 4.8426 0.2065 0.1496 Airline Passengers 3.5333 0.2830 0.1296 Private Wages 1.6856 0.5933 0.4297 Exchange Rate 1.1909 0.8397 0.3846 Agricultural Commodities 3.1190 0.3206 0.2322 Initial UI Claims 10.5183 0.0951 0.0435 Survey Business Conditions 3.8437 0.2602 0.1885 Manufacturing Hours 1.4889 0.6717 0.3077 Survey Business Expectations 4.5151 0.2215 0.1014 Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between June and July of 2014. 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 0.12% 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 45.50 57.26-11.77 0.03-0.39-0.35% Airline Passengers 91.47 90.47 1.00 0.13 0.13 0.12% U.S. Dollar Exchange Rate (Inverse) 102.19 101.94 0.25 0.38 0.10 0.09% Initial Unemployment Insurance Claims (Inverse) 79.27 102.35-23.08 0.04-1.01-0.90% Manufacturing Hours 97.16 97.75-0.59 0.31-0.18-0.16% Survey Business Expectations 1 53.78 3.78 0.10 0.38 0.34% Trend Adjustment 0.13 0.12% Total (weighted average) 111.03 111.86-0.84 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 114.46 114.65-0.19 0.15-0.03-0.03% Private Wage 97.50 98.03-0.54 0.43-0.23-0.22% Agricultural Commodities 149.09 147.95 1.14 0.23 0.26 0.25% Survey Business Conditions 1 50.46 0.46 0.19 0.09 0.08% Total (weighted average) 106.73 106.64 0.09 0.09% 1 Survey results are a diffusion Index, which is always compared to 50 5
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 2013.7 2013.10 2014.1 2014.4 2014.7 2014.10 2015.1 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 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 2012. The comparison ends in 2012 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 0.96. 115.00 Coincident Economic Indicator - Nebraska Comparison with Nebraska Real Quarterly GDP 110.00 105.00 100.00 95.00 90.00 85.00 80.00 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 0.91. 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 80.00 CEI -N (M ay 2007=100) LEI-N, 6 Month F orward (May 2007=100) 6