NSCB - Technical Notes - 3rd Qtr 2009 Composite Leading Economic Indicators

Technical Notes on the Computation of the
Composite Leading Economic Indicator

The Philippines Leading Economic Indicators System (LEIS)
Fourth Quarter of 2009 Release

A. Background

The Leading Economic Indicators System (LEIS) was developed jointly by the National Statistical Coordination Board (NSCB) and the National Economic and Development Authority (NEDA) to serve as basis for short-term forecasting of the macroeconomic activity in the country. The NSCB has since been compiling data for the 11 identified leading economic indicators and generating the Composite Leading Economic Indicator on a quarterly basis.

The LEIS involves the study of the behavior of indicators that consistently move upward or downward before the actual expansion or contraction of overall economic activity. The system is based on an empirical observation that the cycles of many economic data series are related to the cycles of total business activity, i.e. they expand in general when business is growing and contract when business is shrinking. The LEIS was institutionalized to provide advance information on the direction of the country’s economic activity/performance in the short run.

B. Computation of the Composite Leading Economic Indicator

The computation of the composite leading economic indicator involves the use of a reference series and eleven leading economic indicators, namely: (1) consumer price index, (2) electric energy consumption; (3) exchange rate, 4) hotel occupancy rate, 5) money supply; 6) number of new business incorporations, 7) stock price index, 8) terms of trade index, 9) total merchandise imports, 10) tourist arrivals, and 11) wholesale price index.

The reference series used is the non-agriculture component of GDP, or the gross value added (GVA) of the industry and services sectors. This is so because the cycles of GDP and non-agriculture GVA (industry and services) show the same pattern. The cycle of the agriculture GVA when compared to the cycle of GDP, on the other hand, shows a different pattern.

The LEIS methodology includes the decomposition of the reference series and each of the eleven indicators by doing the following steps:

Seasonally adjust and smoothen using X11ARIMA to obtain the cycle-trend component for each of the eleven leading indicators and the reference series (non-agriculture component of the GDP)

Remove the trend component from the seasonally adjusted and smoothened series to obtain the cycle component of each of the indicators by using the Hodrick-Prescott (HP) Filter Method. Starting with the Q1 2004 LEI estimate released on 12 February 2004, the computation of the LEI adopts a new detrending procedure called the Hodrick-Prescott (HP) Filter Method, which has effectively addressed observed limitations in the method used for the estimation of the LEI prior to 2004.

Correlate the cycle of each indicator with the cycle of the non-agriculture GDP (reference series) to obtain the lead period. The lead period determines the number of quarters the cycle series for each indicator is moved forward.
The index is computed as the linear combination of the indicators using the correlation coefficients of the indicators with the non-agriculture GDP as weights. In determining the relationship between the Non-agriculture GVA and the composite indicator, the following simple linear regression model is used:

Non Agri GVA_t = b_t LEI_t + e_tEq. (1)

where: Non agri GVA_t= Cycle component
of the Non-Agriculture GDP

                        b_t        =     Amount of increase
                                                 in the cycle component of the Non-
                                                 Agriculture GDP per unit increase in
                                                 the composite LEI

LEI_t = Composite Leading Economic Indicator

e_t = Error term

The Q4 2009 LEI yielded an adjusted R2 value of 0.7279 as shown below:

Summary Output of the Regression Analysis Between the Composite LEI and the Non-Agriculture GVA Cycle Component, Fourth Quarter of 2009

C. Limitations in the computation of the Composite LEI

The main limitation of the LEIS is the use of forecast data for some of the indicators that are not yet available at the time of the LEI compilation/computation. Forecasting of unavailable data is done to accommodate the timely release of the composite indicator. As the composite indicator is expected to provide advance information on the direction of the country’s economic activity/performance in the short run, the composite indicator is released ahead of the reference quarter. The LEIS currently uses the X11 ARIMA program to forecast data.

The LEI compilation for the fourth quarter of 2009 used forecast data for four (4) indicators namely: (1) electric energy consumption, (2) tourist arrivals, (3) number of new businesses, and (4) hotel occupancy rate. For electric energy consumption, the first three quarters 2009 data were forecasted, for tourist arrivals, the second and third quarters 2009, for number of new businesses, the first and second quarters, and finally for hotel occupancy rate, the fourth quarter of 2008. Forecast for the four variables were obtained using X11 ARIMA software.

Moreover, as new data become available, the series is revised/updated and contribution directions (i.e., positive or negative) of the indicators may consequentially change.

Table 6 shows the latest available data for each of the eleven indicators vis-à-vis the minimum requirements.

Table 6. Data Requirements for the Seasonal Adjustment and
Computation of the Composite LEI for the Fourth Quarter of 2009

Table 6

* CPI (2000=100).
** WPI (1998=100).

Sources of basic data:

Terms of trade index for merchandise goods – National Statistical Coordination Board (NSCB) Money supply - Bangko Sentral ng Pilipinas (BSP)
Total merchandise imports - National Statistics Office (NSO)
Tourist arrivals - Department of Tourism (DOT)
Electric energy consumption - Department of Energy (DOE)
Exchange rate - Bangko Sentral ng Pilipinas (BSP)
Number of new businesses incorporations - Securities and Exchange Commission (SEC)
Stock price index (SPI) – Philippine Stock Exchange (PSE)
Hotel occupancy rate - Department of Tourism (DOT)
Consumer price index (CPI) - National Statistics Office (NSO)
Wholesale price index (WPI) - National Statistics Office (NSO)

D. Definitions: The 11 Leading economic indicators

1. Consumer price index (CPI)

Indicator of the change in the average prices of a fixed basket of goods and services commonly purchased by households relative to a base year (NSCB Resolution No. 11, Series of 2003).

The computation of LEI uses the 2000 based CPI.

Compiling agency: National Statistics Office (NSO)

2. Electric energy consumption (ELECON)

Refers to the quantity of energy consumed measured in gigawatt-hours. It covers the consumption of residential, commercial, industrial, utilities/transport services.

Compiling agencies: Department of Energy (DOE)

3. Peso-Dollar exchange rate (EXCRATE)

Peso-Dollar rate refers to the guiding rate for the exchange of one U.S. dollar (the country's intervention currency) for pesos and is computed as the weighted average of all foreign exchange transactions done through the Philippine Dealing System (PDS) during the preceding day pursuant to Circular Letter dated July 30, 1992. The PDS allows authorized dealers of participating commercial banks and the BSP to deal in spot and forward foreign exchange trading using computer terminals right in their premises from 9:00 A.M. to 12:00 noon and from 2:30 to 4:00 P.M. daily (http://www.bsp.gov.ph/statistics/glossary.asp)

Compiling agency: Bangko Sentral ng Pilipinas (BSP)

4. Hotel occupancy rate (HOTOCC)

Number of rooms occupied for the month over the number of rooms available for sale for the month.

Hotel occupancy rate as used in the LEI covers that of Metro Manila hotels only. The monthly hotel occupancy rate is computed as the overall average of the hotel occupancy rates of the four classes of hotels, namely, De Luxe Class, First Class, Standard Class and Economy Class.

Compiling agency: Department of Tourism (DOT)

5. Money supply - M1 (MONSUP)

Is defined under M.B. Res. 404 dated 14 February 1975 as consisting of currency in circulation and peso deposits subject to check of the monetary system. Also called Narrow Money (http://www.bsp.gov.ph/statistics/glossary.asp)

Real money supply is used in the LEI and is computed as the ratio of money supply M1 over CPI multiplied by 100.

Compiling agency: Bangko Sentral ng Pilipinas (BSP)

6. Number of new business incorporations (NEWBUS)

Total of new corporations and partnerships with initial paid-up capital registered with the Securities and Exchange Commission (SEC) during the reference month. The quarterly data is obtained by summing the monthly data.

Compiling agency: Securities and Exchange Commission (SEC)

7. Stock price index (STKPRC)

Philippine stock price index (SPI) serves as a measure of the changes in, and the movements of, the average prices of company shares of stock traded in the Philippine Stock Exchange (PSE). (http://www.bsp.gov.ph/statistics/glossary.asp)

Compiling agency: Bangko Sentral ng Pilipinas (BSP)
Source of basic data: Philippine Stock Exchange (PSE)

8. Terms of trade index (TTRADE) for Merchandise Goods

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. (NSCB Technical Notes on the Estimates of the Philippine System of National Accounts Series 2004-Q2)

Formula used:

         Terms of Trade Index = Merchandise Export Price Index x 100
                                                Merchandise Import Price Index
         where;

         Merchandise Export Price Index =

FOB value of merchandise exports at current price x 100 FOB value of merchandise exports at base year prices

            Merchandise Import Price Index =

            CIF value of merchandise imports at current price            x 100
            CIF value of merchandise imports at base year prices

Compiling agency: National Statistical Coordination Board (NSCB)

9. Total merchandise imports (IMPORTS)

Goods coming from foreign countries through a seaport or airport of entry and properly cleared by the Bureau of Customs or remaining under its control, whether these are for direct consumption, merchandising, warehousing, or further processing.

Compiling agency: National Statistics Office (NSO)

10. Tourist/visitor arrivals (TOURAR)

Visitor - Any person traveling to a place other than that of his/her usual environment for less than 12 months and whose main purpose of trip is other than the exercise of an activity remunerated from within the place visited. (NSCB Resolution No. 11 Series of 2003)

Compiling agency: Department of Tourism (DOT)

11. Wholesale price index (WPI)

Statistical measure of average changes over time in the wholesale prices of commodities relative to a base year (NSCB Resolution No. 11, Series of 2003).

The computation of LEIS uses the 1998 based WPI.
Compiling agency: National Statistics Office (NSO)

Updated: 08 January 2010.