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

The Leading Economic Indicator (LEI)
drops four quarters in a row
(Posted 28 May 2009)

The composite leading economic indicator (LEI) continued its downward course suggestive of the continuing sluggish economic performance of the country for the period under review. Now on its fourth consecutive quarter of decline, the LEI breached into the negative territory posting negative 0.195 in the second quarter of 2009 from a revised positive 0.045 in the first quarter of 2009. The negative index, although not necessarily an indication of a negative growth for the GDP during the quarter, captures the impact of the global financial crisis that started in 2008 on the Philippine economy.

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: Q2 1986 to Q2 2009

The number of positive contributors as concurrently estimated in this period deteriorated from five in Q2 2008 to four in Q3 2008 to three in both Q4 2008 and Q1 2009 to only two this quarter. Money supply continues to be a positive contributor for 2009, while consumer price index turned around from being a negative contributor to positive contributor for this period. The positive contributors accounted for only 14.2 percent of the total contribution.

The negative contributors - beginning with the largest negative contributor – were, foreign exchange rate, total merchandise imports, wholesale price index, terms of trade index, hotel occupancy rate, tourist arrivals, number of new businesses, stock price index, and electric energy consumption. The negative contributors far outweigh the positive contributors, accounting for 85.8 percent share of total contribution.

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: Second quarter 2009 LEIS

Table 2 shows a historical list of the direction of contribution of the 11 indicators from Q1 2007 to Q2 2009.

Table 2.Contribution direction of the leading economic indicators: Q1 2007 – Q2 2009

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

Top positive contributor

Consumer price index

Consumer price index, which leads by nine quarters in this period, was a consistent negative contributor in 2008 until first quarter 2009. The slower rate of change in the prices of commodities in the first quarter of 2007 is a major factor in the positive contribution of consumer price index in the composite index.

2. Money supply

For the period 2007 to 2009, money supply is a positive contributor in most quarters except in Q1, Q2 and Q4 2008 where it contributed negatively to the index. Money supply, which leads by one quarter, was estimated to have grown by 16.4 percent in the first quarter of 2009 compared to its level in the same period last year.

Top negative contributors

1. 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 to the composite index. However, with the weakening value of the peso vis-à-vis the US dollar starting second quarter of 2008, the indicator started to contribute negatively to the index in fourth quarter of 2008 to the second quarter of 2009.

2. Total merchandise imports

Total merchandise imports, which leads by two quarters for this period, has been a negative contributor since fourth quarter of 2008. There was a substantial drop in the value of imports in the fourth quarter of 2008.

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.

Q1 2009 level for money supply was imputed using February 2009 data. See Section C of Technical Notes for more information on forecasted data.

Table 3 shows the cycle estimates for the 11 indicators for the first and second quarter of 2009 (concurrently estimated for the second 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

Indicators		Direction			Correlation factor^1/	Contribution^2/	Lead Period (in number of quarters)
Indicators		Cycle Q2 2009	Cycle Q1 2009	Slope (Q2 2009 - Q1 2009)	Correlation factor^1/	Contribution^2/	Lead Period (in number of quarters)
1.	Money supply	1.962	1.784	0.178	0.540	0.096	1
2.	Terms of trade index *	1.698	1.179	0.518	(0.357)	(0.185)	1
3.	Tourist arrivals	(1.751)	(1.521)	(0.230)	0.536	(0.123)	1
4.	Electric energy consumption	(0.928)	(0.682)	(0.245)	0.187	(0.046)	2
5.	Foreign exchange rate *	1.684	0.037	1.647	(0.721)	(1.188)	2
6.	Number of new business incorporations	(1.516)	(1.002)	(0.514)	0.230	(0.118)	2
7.	Stock price index	(0.117)	0.058	(0.175)	0.610	(0.107)	2
8.	Total merchandise imports	(2.710)	(0.134)	(2.576)	0.391	(1.006)	2
9.	Wholesale price index	2.062	2.548	(0.485)	0.527	(0.256)	3
10.	Hotel occupancy rate	(0.353)	(0.182)	(0.171)	0.794	(0.136)	5
11.	Consumer price index *	(0.794)	0.058	(0.852)	(0.503)	0.429	9

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 second quarter 2009. Figure 2 plots the composite LEI against the non-agriculture GVA cycle for the same period.

Period	Composite LEI	Slope
2001 Q1	(0.109)	(0.124)
Q2	(0.135)	(0.026)
Q3	(0.152)	(0.017)
Q4	(0.254)	(0.102)
2002 Q1	(0.330)	(0.076)
Q2	(0.265)	0.065
Q3	(0.104)	0.162
Q4	(0.035)	0.069
2003 Q1	(0.106)	(0.072)
Q2	(0.206)	(0.099)
Q3	(0.201)	0.004
Q4	(0.154)	0.047
2004 Q1	(0.129)	0.025
Q2	(0.155)	(0.027)
Q3	(0.184)	(0.029)
Q4	(0.160)	0.024
2005 Q1	(0.112)	0.048
Q2	(0.101)	0.011
Q3	(0.084)	0.017
Q4	(0.053)	0.030
2006 Q1	(0.065)	(0.012)
Q2	(0.075)	(0.009)
Q3	(0.059)	0.015
Q4	(0.027)	0.032
2007 Q1	0.070	0.097
Q2	0.151	0.082
Q3	0.129	(0.023)
Q4	0.195	0.066
2008 Q1	0.359	0.164
Q2	0.434	0.074
Q3	0.396	(0.038)
Q4	0.250	(0.145)
2009 Q1	0.045	(0.205)
Q2	(0.195)	(0.240)

Table 4. Composite Leading Economic Indicator (LEI):

Q1 2001 to Q2 2009

Figure 2. Composite LEI vs Non-Agri GVA cycle

Q1 2001 to Q2 2009

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 the years 2007, 2008 and first quarter of 2009.

Table 5. Composite LEI estimate updates

Quarter	As first released	Updated as of Q2 2009 LEI report	Difference
Q1 2007	0.170	0.070	(0.100)
Q2 2007	0.294	0.151	(0.143)
Q3 2007	0.407	0.129	(0.278)
Q4 2007	0.286	0.195	(0.091)
Q1 2008	0.456	0.359	(0.097)
Q2 2008	0.566	0.434	(0.132)
Q3 2008	0.451	0.396	(0.055)
Q4 2008	0.102	0.250	0.148
Q1 2009	(0.075)	0.045	0.120

The composite LEI for Q1 2009 was revised upwards by 0.120. The composite LEI for all quarters of 2008 and first quarter of 2009 were released as follows:

Q1 2008 – 11 February 2008

Q2 2008 – 30 May 2008

Q3 2008 – 11 August 2008

Q4 2008 – 03 November 2008

Q1 2009 – 26 January 2009

Leading Economic Indicators Main Page

Technical Notes on the 2nd Quarter 2009 LEI