NSCB - Highlights - The Leading Economic Indicator (LEI) on its third consecutive quarter of decline

The Leading Economic Indicator (LEI)
on its third consecutive quarter of decline
(Posted 26 January 2009)

The composite leading economic indicator (LEI) continues its downward streak in the first quarter of 2009¹, to negative 0.075 from positive 0.210 in the fourth quarter of 2008, signifying a deceleration in the country’s economic performance for the period under review. The downturn of the index started in the third quarter² of 2008 and its decline in the first quarter of 2009 became more pronounced, with the index dropping to negative territory. While not necessarily indicating negative GDP growth rate for the quarter, the steepening slide of the LEI bodes ill of the start of the year of the ox and poses a great challenge to the economic managers.

Figure 1 below shows the direction of the composite LEI vis-à-vis the movement of the cycle component of the reference series - the Non-Agriculture gross value added (GVA).

Figure 1. Composite leading economic indicator (LEI) versus
the Non-Agriculture GVA cycle: Q3 1985 to Q1 2009

Chart

The number of Indicators contributing positively to the LEI has likewise started to decrease from seven in Q2 2008, five in Q3 2008, two in Q4 2008 to only one in Q1 2009. The lone indicator contributing positively to the LEI for the first quarter of 2009 was money supply. The negative contributors - beginning with the largest negative contributor – were, stock price index, foreign exchange rate, consumer price index, number of new businesses, wholesale price index, electric energy consumption, hotel occupancy rate, tourist arrivals, total merchandise imports, and terms of trade index.

Money supply accounted for a meager 2.7 percent of total contribution, while negative contributors posted a sizeable 97.3 percent share. The first quarter share of the positive contributors dropped further by 1.9 percentage points, from the 5.6³ percent share computed in the fourth quarter 2008 LEI.

The contribution of each of the eleven (11) indicators is measured through the combined effects of 1) the direction (the slope or change) of the cycle component of each of the indicators; and 2) the correlation of their cycle components with that of the Non-agriculture GVA (combined GVAs of industry and services). Table 1 shows the share to total contribution of the positive and negative contributors.

Table 1. Contributions of the leading economic indicators: First quarter 2009 LEIS

Table

Notes

* Inverse relationship with GDP.
1/ Contribution = slope x correlation coefficient
2/ Total contribution = summation of the absolute values of contribution.
3/ Share to total contribution = percentage share of the contribution of each indicator to total contribution.
4/ Share to total contribution = percentage share of contributors by type of contribution.
5/ Rank = rank of the indicators in contribution, 1 being the highest.

The top two negative contributors are stock price index and foreign exchange rate. Stock price index had been a significant positive contributor since the first quarter of 2007 until it changed its direction in the third quarter of 2008 and pulled the index down. Similarly, foreign exchange rate, was also consistently contributing positively in the index starting the first quarter of 2007 until its shift in the fourth quarter of 2008.

Table 2 shows a historical list of the direction of contribution of the 11 indicators from Q1 2007 to Q1 2009.

Table 2. Contribution direction⁴ of the leading economic indicators: Q1 2007 – Q1 2009

Table

The following plots show data on the levels⁵ and cycles of the lone positive and top two negative contributors to the composite LEI for the first quarter of 2009.

Top positive contributor

1. Money supply

A consistent positive contributor in all quarters of 2007, money supply⁶ was a negative contributor in 2008, except in Q3. For the first quarter of 2009, money supply, which leads by one quarter, contributed positively in the index as it is expected to expand in the fourth quarter of 2008 by 7.3 percent⁷ compared to its levels in the same period last year.

Top negative contributors

1. Stock price index

Since the first quarter of 2003 stock price index had been steadily on the rise even exhibiting a steep climb in the third quarter of 2007. However, at the close of 2007 until the first quarter of 2008 it started to slow down, even changing its contribution from positive to negative. For all quarters of 2007 and the first two quarters of 2008, stock price index consistently topped all indicators in contributing positively to the composite LEI.

2. Foreign exchange rate

The stronger value of peso against the US dollars since 2005 has been a significant factor in the positive contribution of peso-dollar exchange rate in the composite index. However, with the weakening value of the peso vis a vis the US dollar starting second quarter of 2008, the indicator started to contribute negatively to the index in fourth quarter of 2008.

Table 3 shows the cycle estimates for the 11 indicators for the fourth quarter of 2008 and first quarter of 2009 (concurrently estimated for the first quarter 2009 LEIS), slopes, correlation coefficients, contribution values and lead periods.

Table 3. Cycles, Slopes, Correlation coefficients, and Lead Periods of the 11 Leading Indicators with the Non-Agriculture GVA

Table

Notes:

1/ Statistically significant at 0.05 percent level and highest correlation coefficient which corresponds to indicated lead period.
2/ Contribution = slope x correlation factor
* Inverse relationship with GDP.

Table 4 below shows the composite LEI estimates and the corresponding slopes for the period first quarter 2001 to first quarter 2009. Figure 2 plots the composite LEI against the non-agriculture GVA cycle for the same period.

Table 4. Composite Leading Economic Indicator (LEI): Q1 2001 to Q1 2009

Table

Figure 2. Composite LEI vs Non-Agri GVA cycle Q1 2001 to Q1 2009

Chart

The estimates of the composite LEI are continuously updated when revised or more recent data become available. Below are the updated estimates of the composite LEI for all quarters of 2007 and 2008.

Table 5. Composite LEI estimate updates

Table

The composite LEI for Q4 2008 was revised upwards by 0.108. The composite LEI for all quarters of 2007 and 2008 were released as follows:

Q1 2007 - 28 February 2007
Q2 2007 - 17 May 2007
Q3 2007 - 17 August 2007
Q4 2007 - 13 December 2007
Q1 2008 - 11 February 2008
Q2 2008 - 30 May 2008
Q3 2008 - 11 August 2008
Q4 2008 - 03 November 2008

___________________________

¹ See Table 4 for composite LEI estimates for Q1 2001 to Q1 2009 concurrently estimated for the Q1 2009 LEIS.

² See Highlights of the Q3 2008 LEI report accessible at http://www.nscb.gov.ph/lei/2008/3Qlei/3thQ08_LEI_highlights.asp

³ See Table 1 of the Q4 2008 LEI report accessible at http://www.nscb.gov.ph/lei/2008/4Qlei/4thQ08_LEI_highlights.asp

⁴ The contribution direction (i.e., negative or positive contribution) of each of the eleven indicators may change every quarter as the LEI is estimated. For the first quarter 2009 estimation of the LEI, the indicators that changed contribution direction from fourth quarter 2008 LEIS to first quarter 2009 are as follows:

From negative to positive contribution:
                 1. Money supply



From positive to negative contribution:

Electric energy consumption

Wholesale price index

⁵ Truncated based on the indicators’ lead periods. See Table 3 for the list of indicator leads; and Section C, Table 6 of the Technical Notes for the schedule of data used/required in the seasonal adjustment of the 11 leading indicators and the computation of the composite LEI.

⁶ Real money supply (M1) computed as the ratio of money supply M1 over CPI multiplied by 100. The quarterly figures are that of the last month of the reference quarter (e.g., March levels for Q1). See Section D of Technical Notes for the definition of the indicators.

⁷ Q4 2008 level for money supply was forecasted using X11ARIMA program. See Section C of Technical Notes for more information on forecasted data.

Leading Economic Indicators Main Page

Technical Notes on the 1st Quarter 2009 LEI