NSCB - Highlights - Drop in the Leading Economic Indicator (LEI) slows down in the third quarter

Drop in the Leading Economic Indicator (LEI)
slows down in the third quarter
(Posted 02 October 2009)

The descent of the composite leading economic indicator (LEI) has moderated in the third quarter of the 2009, an indication that the Philippine economy may be on its way to a slow recovery from the crisis that gripped the global economy starting in late 2008. The LEI slid to negative 0.425¹ in the third quarter of 2009 from a revised negative 0.312² in the second quarter of 2009. Although the LEI is still in the negative territory, its slope has tapered compared to its movement in the past quarters, suggesting that the impact of global crisis may have bottomed out.

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 1986 to Q3 2009

Chart

The number of positive³ contributors as concurrently estimated in this period showed signs of improvement as well, from one in Q3 2008 to three in Q4 2008, and four in the first three quarter of 2009. The positive contributors, starting with the largest positive contributor, were: wholesale price index, consumer price index, electric energy consumption, and tourist arrivals. The positive contributors accounted for only 32.0 percent of the total contribution.

The negative contributors, beginning with the largest negative contributor, were: stock price index, hotel occupancy rate, money supply, total merchandise imports, foreign exchange rate, terms of trade index, and number of new businesses. The negative contributors still outweigh the positive contributors, accounting for 68.0 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 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:
Third 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.

Table 2 shows a historical list of the direction of contribution of the 11 indicators from Q1 2008 to Q3 2009 based on updated/revised data as of Q3 2009 estimation. Hence, the contribution direction of the indicators for the past quarters may not necessarily be the same as in previous reports.

Table 2.Contribution direction⁴ of the leading economic indicators: Q1 2008 – Q3 2009

Table 2

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

Top positive contributor

1. Wholesale price index

Wholesale price index, leading by five quarters this period, was a consistent positive contributor since first quarter of 2009.

WPI

2. Consumer price index

A consistent negative contributor in the first three quarters of 2008, consumer price index became a positive contributor starting fourth quarter 2008. The positive contribution of CPI in the composite index was largely due to the slower rate of change in prices of commodities in the first quarter of 2007. CPI leads by ten quarters in this period.

CPI

Top negative contributors

1. Stock price index

The drop in stock price index since Q1 2009 made it the top negative contributor for the period. Stock price index, which leads by one quarter this period, had been contributing negatively in the composite leading indicator for six consecutive quarters.

Stock Price Index

2. Hotel occupancy rate

Leading by four quarters in this period, hotel occupancy rate dropped by almost ten percent in the third quarter of 2008, making it the second top negative contributor in the composite leading index. The indicator has been a negative contributor since Q1 2008.

Hotel Occupancy Rate

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

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

Table 3 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 third quarter 2009. Figure 2 plots the composite LEI against the non-agriculture GVA cycle for the same period.

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

Table 5

The composite LEI for Q2 2009 was revised downwards by 0.118. The composite LEI for all quarters of 2008 and first two 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
Q2 2009 – 28 May 2009

______________

¹ See Table 4 for composite LEI estimates for Q1 2001 to Q3 2009 concurrently estimated for the Q3 2009 LEIS.

² See Highlights of the Q2 2009 LEI report accessible at http://www.nscb.gov.ph/lei/2009/2Qlei/2ndQ09_LEI_highlights.asp; See Table 5 for the revised/ updated LEI for Q1 2007 to Q2 2009

³ The number of positive contributors in the previous quarters as presented in past reports may be revised every quarter when the LEI is estimated.

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 third quarter 2009 estimation of the LEI, the indicators that changed contribution direction from second quarter 2009 LEIS to third quarter 2009 are as follows:

From negative to positive contribution: 1. Tourist arrivals
From positive to negative contribution: 1. Money supply

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 Notesfor theschedule of data used/required in the seasonal adjustment of the 11 leading indicators and the computation of the composite LEI.

Leading Economic Indicators Main Page

Technical Notes on the 3rd Quarter 2009 LEI