NSCB - Highlights - Leading Economic Indicator (LEI) expands three quarters in a row

Leading Economic Indicator (LEI) expands three quarters in a row
(Posted 18 January 2012)

The composite leading economic indicator (LEI) continued its upward course after it weakened in the second quarter of 2011, indicating a positive outlook for the country’s economy. For the first quarter of 2012, the LEI posted 0.238¹ from a revised 0.158² in the fourth quarter of 2011. The latest LEI computations show the index in firmer positive territory auguring well for the domestic economy to start off the year of the dragon.

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 1988 to Q1 2012

fig1

Table 1 below shows the composite LEI estimates and the corresponding slopes for the period first quarter 2001 to first quarter 2012. Figure 2 plots the composite LEI against the non-agriculture GVA cycle for the same period.

Table 1. Composite Leading Economic Indicator (LEI): Q1 2001 to Q1 2012

tab1

Of the eleven indicators that make up the composite LEI, eight contributed positively. The positive contributors include, starting with the largest positive contributor: (1) visitor arrivals³, (2) stock price index, (3) hotel occupancy rate, (4) wholesale price index, (5) total merchandise imports, (6) electric energy consumption, (7) consumer price index, and (8) number of new businesses. The combined share of positive contributors for this quarter increased to 82.1 percent from 65.5 percent in Q4 2011, bolstering the healthier prospects for the economy (Table 2).

On the other hand, the negative contributors, beginning with the largest negative contributor, were: (1) terms of trade index, (2) money supply, and (3) foreign exchange rate. The negative contributors accounted for 17.9 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 2 shows the share to total contribution of the positive and negative contributors.

Table 2. Contributions of the leading economic indicators: First quarter 2012 LEIS

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 3 shows a list of the direction of contribution of the 11 indicators from Q1 2008 to Q1 2012 as first released.

For the Q1 2012 LEI, three indicators shifted direction in contribution from the fourth quarter of 2011, namely: total merchandise imports and wholesale price index, from negative to positive, and foreign exchange rate, from positive to negative.

Table 3. Contribution direction ⁴of the leading economic indicators:
Q1 2008 to Q1 2012

The top two positive and top two negative contributors to the composite LEI for the first quarter of 2012 are: visitor arrivals and stock price index; and terms of trade index and money supply, respectively. In the Q4 2011 LEI estimation, the top two positive contributors were number of new businessesand visitor arrivals, while the top negative contributors were total merchandise imports and wholesale price index.

The following plots show the levels ⁵ and cycles of the positive contributors followed by the negative contributors:

Positive contributors

Visitor Arrivals

Visitor arrivals, which leads by one quarter has been a consistent positive contributor to the composite LEI since second quarter of 2010, interrupted only in Q3 2011. Visitor arrivals has been posting double-digit growths in all quarters of 2010 and 2011, registering 15.7 percent in the fourth quarter of 2011 or an estimated one million visitors.

business cycle

2. Stock Price Index

The momentum gained in Q4 2009 followed by progressively upward movement placed stock price index as the second top positive contributor. Leading by one quarter, stock price index has consistently been contributing positively to the composite LEI for eight consecutive quarters starting in Q2 2010 after six quarters of continued negative contribution.

3. Hotel Occupancy Rate

Leading by three quarters, the increase in hotel occupancy rate by 0.8 percentage points in Q2 2011 from 67.5 in Q2 2010 to 68.3 has placed the indicator among the positive contributors. Hotel occupancy rate has been contributing positively to the composite LEI for three consecutive quarters.

4. Wholesale Price Index

After contributing negatively to the Q4 2011 LEI, wholesale price index (WPI) reverted to being a positive contributor in Q1 2012. Except in Q4 2011, WPI has been contributing positively sine Q1 2011.

5. Total Merchandise Imports

Despite the decelerating growth since Q1 2011, total merchandise imports contributed positively to the Q1 2012 LEI after two quarters of negative contribution.

6. Electric Energy Consumption

Starting the first quarter of 2011, electric energy consumption has been contributing positively to the index. With one quarter lead, the year on year growth of electric energy consumption displayed almost stationary quarterly movements in 2010 and 2011⁶.

7. Consumer Price Index

Having an inverse relationship to GDP and leading by ten quarters, consumer price index (CPI) has consistently pulled up the composite LEI since Q2 2011 as CPI continued to decelerate in Q3 2009. CPI year-on-year growth has been on a downward trend since Q4 2008 by 9.7 percent, 6.9 percent in Q1 2009, 3.2 percent in Q2 2009, and 0.29 percent in Q3 2009.

8. Number of New Businesses

With one quarter lead period, number of new business inched up by 2.9 percent in Q4 2011, pulling up the composite LEI.

Negative contributors

1. Terms of Trade Index

Having an inverse relationship to GDP and leading by ten quarters, terms of trade index registered three consecutive quarters of increases since Q4 2008 to Q3 2009 after a series of declines since Q2 2005. The indicator has contributed negatively to the LEI starting in Q2 2011.

Terms of trade index for merchandise goods is the ratio of export price index to the import price index. It measures the changes in the prices received for exports relative to the prices for imports.

2. Money Supply

With a lead of one quarter, money supply grew by6.2 percent in Q4 2011 after registering three quarters of decelerated growth. Despite the acceleration, money supply remained as negative contributor for six consecutive quarters which started in Q4 2010.

3. Foreign Exchange Rate

After contributing positively to the LEI since Q4 2009 which was interrupted in the second quarters of 2010 and 2011, foreign exchange rate shifted to being a negative contributor to the Q1 2011 composite index. Leading by two quarters and with an inverse relationship to GDP, foreign exchange rate has been going down for the past eight quarters, recording a 5.6 percent decline in the third quarter of 2011 at PhP 42.7 per US dollar from PhP45.3 in Q3 2010. For the quarter beyond the lead period of LEI, i.e., Q4 2011, foreign exchange rate was at PhP 43.5.

Table 4 shows the cycle estimates, slopes, correlation coefficients, contribution values and lead periods of the 11 indicators for the fourth quarter 2011 and first quarter 2012 (concurrently estimated for first quarter 2012 LEIS).

Table 4. Cycles, Slopes, Correlation coefficients, and Lead Periods
of the 11 Leading Indicators with the Non-Agriculture GVA

* Inverse relationship with GDP.

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

The estimates of the composite LEI are continuously updated when revised or more recent data become available. Table 5 shows the comparison between the previously released and the updated estimates of the composite LEI from Q1 2007 to Q1 2012.

Table 5. Composite LEI estimate updates

Looking at the past estimates, the composite LEI was revised as follows: 2007, downwards by an average of 0.065; 2008, upwards by an average of 0.015; 2009, downwards by an average of 0.050; 2010, upwards by an average of 0.095; and for 2011, downwards by an average of 0.023.

The composite LEI for the first, second and third quarters of 2011 were released as follows:

Q1 2011 – 10 February 2011
Q2 2011 – 31 March 2011
Q3 2011 – 14 September 2011
Q4 2011 – 8 November 2011

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¹ See Table 1 for composite LEI estimates for Q1 2001 to Q1 2012 concurrently estimated for the Q1 2012 LEIS.

² See Table 5 for the revised/ updated LEI for Q1 2007 to Q4 2011. 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 Per UNWTO International Recommendations on Tourism Statistics (IRTS) 2008 recommendations, tourist arrivals will now be called visitor arrivals

⁴ The contribution direction (i.e., negative or positive contribution) of each of the eleven indicators may change each quarter the LEI is estimated. For the first quarter 2012 estimation of the LEI, the indicators that changed contribution direction from fourth quarter 2011 to first quarter 2012 LEIS are as follows:

From negative to positive:                   Total merchandise imports
                                                        Wholesale price index

From positive to negative:                   Foreign exchange rate

Also, in the LEI Reports from Q3 2009 to Q3 2011, the contributions of each of the 11 indicators for the entire series were based on the updated correlation coefficients as of the latest LEI.

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 2011 figures are forecasted using X11 ARIMA

Leading Economic Indicators Main Page

Technical Notes on the 1st Quarter 2012 LEI