Nebraska Monthly Economic Indicators: September 20, 2017 Prepared by the UNL College of Business Administration, 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 0.38% during August of 2017. The decline in the LEI-N, which is designed to predict economic activity six months into the future, suggests that the Nebraska economy will grow slowly during the first few months of 2018. The drop in the indicator was primarily due to a decline in manufacturing hours-worked during August. Building permits for single-family homes and airline passenger enplanements also dropped slightly. There were two positive components of the LEI-N. Businesses responding to the August Survey of Nebraska Business reported plans to increase sales and employment over the next six months. The value of the U.S. dollar also continued its recent decline during August, a positive sign for Nebraska s export-oriented businesses. Leading Economic Indicator Nebraska Figure 1 shows the change in the Leading Economic Indicator Nebraska (LEI-N) during August 2017 compared to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N fell by 0.38% in August. Figure 1: Change in LEI-N August 2017 2.46% 1.23% -1.23% -2.46% Rapid Growth Moderate Growth Moderate Decline Rapid Decline -0.38% Figure 2 shows the change in the LEI-N over the last six months. The indicator has increased overall since February. Increases in March, June and July have been larger than declines during the other months, implying that the Nebraska economy will expand through February 2018. 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 2.46% 1.23% 1.81% Figure 2: Change in LEI - N Last 6 Months 2.37% 0.73% -1.23% -0.64% -0.05% -0.38% -2.46% Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Figure 3 shows the components of change in the Leading Economic Indicator Nebraska during August 2017. The change in the overall LEI N is the weighted average of changes in each component (see page 5). Four of six components of the LEI-N worsened during July. There was a sharp decline in manufacturing hours-worked during August. There were small declines in building permits for single-family homes and airline passenger counts. In terms of improving components, business expectations were positive as respondents to the August Survey of Nebraska Business predicted growth in both sales and employment at their businesses over the next six months. The value of the U.S. dollar also declined again during August, which is a positive development for Nebraska exporters in manufacturing, agriculture and other sectors. Note that the trend adjustment component pictured in Figure 3 is discussed on page 5. 2.46% Figure 3: LEI-N Components of Change August 2017 1.23% -1.23% -2.46% -0.03% -0.10% 0.29% -0.04% -1.00% 0.39% 0.10% 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 fell by 1.01% during August 2017, as seen in Figure 4. 2.58% 1.29% Figure 4: Change in CEI-N August 2017 Rapid Growth Moderate Growth Moderate Decline -1.29% -2.58% Rapid Decline -1.01% Figure 5 shows the change in the CEI-N over the last 6 months. The CEI-N rose every month between March and July, suggesting that economic growth has been solid in mid-2017, despite the August decline. Figure 5: Change in CEI-N Last 6 Months 2.58% 1.29% 1.10% 1.52% 0.44% 1.48% 0.55% -1.29% -2.58% -1.01% Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 All of four components of the CEI-N fell during August (Figure 6). Agricultural commodity prices fell and there was a modest decline in electricity sales after adjusting for weather and seasonal factors. There also was a small drop in business conditions as reported by respondents to the August Survey of Nebraska Business. The largest decline in August was in real private wages, which reflects employment, weekly hours-worked and 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 2.58% Figure 6: CEI-N Components of Change Augst 2017 1.29% -1.29% -2.58% -0.06% -0.75% -0.17% -0.03% Figure 7 shows the forecast for the CEI-N over the next six months. The Nebraska economy is expected to grow during the last four months of 2017, but the rate of growth will slow during early 2018. These expectations are consistent with the changes in the LEI-N over the last six months (Figure 2). 1.30% 0.80% 0.30% -0.20% -0.70% -1.20% -1.70% Figure 7: 6-Month Forecast of Coincident Economic Indicator - Nebraska 0.85% -0.12% 1.14% 0.67% 0.02% 0.10% Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 124.00 122.00 120.00 118.00 Index Growth Index Value 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 large 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 13.3783 0.0747 0.0352 Electricity Sales 4.6181 0.2165 0.1623 Airline Passengers 3.3142 0.3017 0.1423 Private Wages 1.8206 0.5493 0.4117 Exchange Rate 1.2009 0.8327 0.3927 Agricultural Commodities 3.3181 0.3014 0.2259 Initial UI Claims 11.0058 0.0909 0.0428 Survey Business Conditions 3.7475 0.2668 0.2000 Manufacturing Hours 1.7001 0.5882 0.2774 Survey Business Expectations 4.3039 0.2323 0.1096 Tables 2 and 3 show the calculation for the change in LEI-N and CEI-N between July and August of 2017. 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 0.10% 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 65.11 66.11-1.00 0.04-0.04-0.03% Airline Passengers 101.23 102.15-0.92 0.14-0.13-0.10% U.S. Dollar Exchange Rate (Inverse) 87.64 86.64 1.00 0.39 0.39 0.29% Initial Unemployment Insurance Claims (Inverse) 136.16 137.50-1.34 0.04-0.06-0.04% Manufacturing Hours 91.80 96.69-4.89 0.28-1.36-1.00% Survey Business Expectations 1 54.86 4.86 0.11 0.53 0.39% Trend Adjustment 0.13 0.10% Total (weighted average) 135.22 135.75-0.52-0.38% 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 161.99 162.42-0.44 0.16-0.07-0.06% Private Wage 112.21 114.42-2.21 0.41-0.91-0.75% Agricultural Commodities 119.35 120.29-0.94 0.23-0.21-0.17% Survey Business Conditions 1 49.82-0.18 0.20-0.04-0.03% Total (weighted average) 120.49 121.72-1.23-1.01% 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 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 CEI-N (May 2007=100) 2008.7 CEI-N (May 2007=100) LEI-N, 6 Month Forward (May 2007=100) 2009.1 2009.7 Real GDP (May 2007=100), SA 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 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 2016. 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. 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 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 140.00 130.00 120.00 110.00 100.00 90.00 80.00 6