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The composite leading economic indicator (LEI) continued to rise in the third quarter of 2010 but at a pace not as remarkable as in the first two quarters of the year.  The Q3 2010 LEI improved to negative 0.037¹ from a revised negative 0.090² in the second quarter of 2010 (Figure 1). 

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 2010

The number of positive³ contributors as concurrently estimated totaled to nine, compared to Q2 2010 where all eleven indicators contributed positively, and ten in Q1 2010. The combined share of positive contributors for this quarter consequently dropped to only 68.3 percent from the 100.0⁴ percent and 97.4 percent in the second and first quarters, respectively.

The positive contributors, starting with the largest positive contributor, were: consumer price index, money supply, total merchandise imports, terms of trade index, hotel occupancy rate, stock price index, tourist arrivals, foreign exchange rate, and electric energy consumption. The two negative contributors, beginning with the largest negative contributor, were: number of new businesses, and wholesale price index. The negative contributors accounted for 31.7 percent 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 indicator; and 2) the correlation of their cycle components with that of the reference series. Table 1 shows the share to total contribution of the positive and negative contributors.

Table 1. Contributions of the leading economic indicators: Third quarter 2010 LEIS

Indicator	Slope (Q3 2010  - Q2 2010)	Correlation coefficient	Contribution a/	Share to total contribution c/ ( % )	Rank e/
					positive contributors	negative contributors
Consumer price index *	(0.435)	(0.486)	0.212	13.49	1	na
Money supply	0.545	0.437	0.238	15.19	2	na
Total merchandise imports	0.501	0.332	0.167	10.62	3	na
Terms of trade index*	(0.436)	(0.293)	0.128	8.17	4	na
Hotel occupancy rate	0.131	0.751	0.099	6.28	5	na
Stock price index	0.259	0.376	0.097	6.21	6	na
Tourist arrivals	0.141	0.531	0.075	4.78	7	na
Foreign exchange rate *	(0.053)	(0.620)	0.033	2.08	8	na
Electric energy consumption	0.095	0.237	0.023	1.44	9	na
Number of new businesses	(0.827)	0.434	(0.359)	22.89	na	1
Wholesale price index	(0.330)	0.421	(0.139)	8.85	na	2
Total contribution b/			1.57
Share to Total contribution d/  ( % )				100.0	68.3	31.7

Notes:
 *  Inverse relationship with GDP.
 a/ Contribution = slope x correlation coefficient
 b/ Total contribution = summation of the absolute values of contribution.
 c/ Share to total contribution = percentage share of the contribution of each indicator to total contribution.
 d/ Share to total contribution = percentage share of contributors by type of contribution.
 e/ 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 2010 based on updated/revised data as of Q3 2010 LEI 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 direction⁵ of the leading economic indicators: Q1 2008 – Q3 2010

Indicator	Q1 2008	Q2 2008	Q3 2008	Q4 2008	Q1 2009	Q2 2009	Q3 2009	Q4 2009	Q1 2010	Q2 2010	Q3 2010
Consumer Price Index	+	+	+	+	-	-	-	-	+	+	+
Electric energy consumption	-	-	-	-	+	-	-	+	+	+	+
Foreign exchange rate	+	+	-	-	-	-	-	+	+	+	+
Hotel occupancy rate	-	-	+	-	-	-	-	+	+	+	+
Total merchandise imports	+	+	-	-	-	-	-	+	+	+	+
Money supply	-	-	-	+	+	+	+	+	+	+	+
Number of new businesses	+	+	+	-	-	-	+	+	+	+	-
Stock Price Index	+	-	-	-	-	-	-	-	-	+	+
Tourist arrivals	+	-	-	-	-	-	-	+	+	+	+
Terms of trade index	+	+	-	-	-	-	-	-	+	+	+
Wholesale Price Index	+	+	+	-	-	-	-	+	+	+	-

The following plots show the levels⁶ and cycles of the top two positive and top two negative contributors to the composite LEI for the third quarter of 2010, namely, consumer price index and money supply, and number of new businesses and wholesale price index, respectively.  In Q2 2010, the top positive contributor was total merchandise imports and the second was the consumer price index

Top positive contributors       

1. Consumer price index

The positive contribution of consumer price index (CPI), which leads by four quarters, was largely due to the significant slowdown of movement in prices of commodities in the third quarter of 2009 as it grew by only 0.3 percent compared to the 12.2 percent in the same period of the previous year.

2. Money Supply

Money supply⁷, which leads by one quarter, grew by 11.4 percent in the second quarter of 2010 compared to its level in the same period last year, which resulted in the positive contribution to the composite index. Money supply, a consistent positive contributor is now on its eight consecutive quarters of positive growths.

Top negative contributors      

1. Number of new businesses

The negative contribution of number of new business, which leads by one quarter, was due to the decline in the number of new businesses registered in Q2 2010 by 8.2 percent, from a level of 2,967 in Q2 2009 to a level of 2,725 in Q2 2010. The contribution of the number of new businesses has reverted to negative after four consecutive quarters of positive contributions.

2. Wholesale price index

After consistently contributing positively to the index since the fourth quarter of 2009, wholesale price index (WPI) together with number of new business pulled the index down in the third quarter of 2010. The decelerated growth of WPI in the second quarter, particularly for April and May, signaled that the cycle of wholesale price index for Q3 2010 is on its way down.

Table 3 shows the cycle estimates, slopes, correlation coefficients, contribution values and lead periods of the 11 indicators for the second quarter and third quarter 2010 (concurrently estimated for third quarter 2010 LEIS). 

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

Indicators		Direction			Correlation factor 1/	Contribution2/	Lead Period (in number of quarters)
		Cycle  Q3 2010	Cycle  Q2 2010	Slope                   (Q3 2010 - Q2 2010)
1	Consumer price index *	(0.537)	(0.102)	(0.435)	(0.486)	0.212	4
2	Electric energy consumption	0.050	(0.046)	0.095	0.237	0.023	1
3	Foreign exchange rate *	0.472	0.525	(0.053)	(0.620)	0.033	1
4	Hotel occupancy rate	(0.066)	(0.197)	0.131	0.751	0.099	2
5	Total merchandise imports	0.888	0.386	0.501	0.332	0.167	1
6	Money supply	1.697	1.152	0.545	0.437	0.238	1
7	Number of new business incorporations	(0.413)	0.414	(0.827)	0.434	(0.359)	1
8	Stock price index	(2.177)	(2.436)	0.259	0.376	0.097	1
9	Tourist arrivals	(0.230)	(0.371)	0.141	0.531	0.075	1
10	Terms of trade index *	0.314	0.751	(0.436)	(0.293)	0.128	1
11	Wholesale price index	(0.401)	(0.071)	(0.330)	0.421	(0.139)	1

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 second quarter 2001 to third quarter 2010. 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 Q3 2010

Period	Composite LEI	Slope
2001 Q1	(0.113)	(0.041)
Q2	(0.110)	0.003
Q3	(0.142)	(0.032)
Q4	(0.289)	(0.147)
2002 Q1	(0.419)	(0.130)
Q2	(0.358)	0.061
Q3	(0.150)	0.208
Q4	(0.032)	0.118
2003 Q1	(0.076)	(0.045)
Q2	(0.189)	(0.112)
Q3	(0.259)	(0.070)
Q4	(0.171)	0.088
2004 Q1	(0.001)	0.170
Q2	0.074	0.075
Q3	0.035	(0.038)
Q4	(0.019)	(0.055)
2005 Q1	(0.069)	(0.050)
Q2	(0.076)	(0.007)
Q3	(0.027)	0.049
Q4	(0.013)	0.014
2006 Q1	(0.024)	(0.011)
Q2	(0.033)	(0.009)
Q3	(0.041)	(0.008)
Q4	(0.028)	0.013
2007 Q1	0.046	0.074
Q2	0.171	0.125
Q3	0.288	0.118
Q4	0.452	0.163
2008 Q1	0.607	0.155
Q2	0.681	0.074
Q3	0.655	(0.026)
Q4	0.442	(0.213)
2009 Q1	0.002	(0.440)
Q2	(0.422)	(0.424)
Q3	(0.624)	(0.202)
Q4	(0.565)	0.059
2010 Q1	(0.306)	0.259
Q2	(0.090)	0.216
Q3	(0.037)	0.052

 

Figure 2. Composite LEI vs Non-Agri GVA cycle Q1 2001 to Q3 2010

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 2009 and Q1 to Q2 2010.

Table 5. Composite LEI estimate updates

Quarter	As first released	Updated as of Q3 2010 LEI report	Difference
Q1 2007	0.170	0.046	(0.123)
Q2 2007	0.294	0.171	(0.123)
Q3 2007	0.407	0.288	(0.119)
Q4 2007	0.286	0.452	0.166
Q1 2008	0.456	0.607	0.151
Q2 2008	0.566	0.681	0.115
Q3 2008	0.451	0.655	0.204
Q4 2008	0.102	0.442	0.340
Q1 2009	(0.075)	0.002	0.077
Q2 2009	(0.195)	(0.422)	(0.227)
Q3 2009	(0.425)	(0.624)	(0.199)
Q4 2009	(0.640)	(0.565)	0.075
Q1 2010	(0.470)	(0.306)	0.164
Q2 2010	(0.348)	(0.090)	0.259

The composite LEI for Q2 2010 was revised upwards by 0.259. The composite LEI for all quarters of 2008 and 2009 as well as for the first and second quarters of 2010 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
Q3 2009 – 02 October 2009
Q4 2009 – 08 January 2010
Q1 2010 – 08 March 2010
Q2 2010 – 03 June 2010

_____________

¹ See Table 4 for composite LEI estimates for Q1 2001 to Q3 2010 concurrently estimated for the Q3 2010 LEIS.

² See Highlights of the Q2 2010 LEI report accessible at http://ns_webserver/lei/2010/2Qlei_10/2ndQ10_LEI_highlights.asp
See Table 5 for the revised/ updated LEI for Q1 2007 to Q2 2010. The estimates of the composite LEI are revised and the direction may change due to revised or availability of recent indicators that make up the composite LEI.

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 contributions are based on the revised estimates concurrently estimated in Q3 2010.

⁵ 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 2010 estimation of the LEI, the indicators that changed contribution direction from second quarter to third quarter 2010 LEIS are as follows:

From negative to positive contribution:

From positive to negative contribution: Wholesale price index Number of new businesses

⁶ 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.

⁷ Adjusted for inflation

 

 

 

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