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Revisions analysis of OECD composite leading indicators

(CLI)

Emmanuelle Guidetti

Third Joint European CommissionOECD Workshop on Business and Consumer Tendency Surveys

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Introduction

A leading indicator is a statistic that signals the movements, up and down, of future economic activity before they occur, and it may also give some indication of the magnitude of those movements.

What is the purpose of the OECD CLI?

How is the OECD CLI constructed?

What is the current period performance of the CLI?

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What is the purpose of the OECD CLI?

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How is the OECD CLI constructed?

Selection of Reference

series

Selection of

components series

PAT box (de-trending the series)

PeriodicityTransformation(monthly basis)

Smoothing (reduce irregularity)

Normalisation (cyclical amplitude

homogenised)Weighting

Aggregationinto a single indicator (the minimum % of

component series required is 60%)

Presentation of CLI

- Amplitude adjustment (refers to the deviation from the long-term trend of the series and focuses

on the cyclical behaviour of the indicator)- Trend restoration (gives information about the

likely rate and amplitude of changes)- Six months rate of change (is less volatile and provides earlier and clearer signals for future

turning points than the CLI itself.)

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What is the current performance of the CLI?

The aim of the current analysis on CLIs is to evaluate the quality of the indicator when they are first released in order to:

• identify areas where their reliability could be improved

• provide further information to users on their use for economic analyses.

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Why do we have revisions?

• Timeliness/availability

• Frequency

• Smoothness

• Other factors

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Size of revisions

Revision: Rt=Lt-Pt

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Size of revisions over time

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Assessment of bias

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Reliability of 1st estimate as a signal of short-term expansion or slowdown in economic activity

First measure is the sign of the movements around 90% of the time, for almost of the countries, the sign of the initial estimates of year-on-year growth rates are the same as those published one month later. This ratio becomes 95% while talking about zone aggregates.

Second measure is the acceleration/deceleration testAround 80% of the time, for around 40% of the countries, the first estimate of year-on-year growth rates signals no difference in direction with the 2nd estimates. This ratio becomes almost 90% while talking about zone aggregates.

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Reliability of 1st estimate to provide early signals of turning points in economic activity

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Reliability of 1st estimate to provide early signals of turning points in economic activity

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Conclusion

1st releases of CLI are revised frequently but the size is rather small for most countries and negligible for aggregates.

No evidence of bias

Improvement in the reliability of the 2nd estimates

1st and 2nd estimates of year-on-year growth rates give reliable signals of approaching cyclical turning points

It is not enough to have timely components they also need to be smooth to guarantee small revisions. This further reinforces the argument that smoothness is probably the most important factor explaining revisions to the OECD CLI.

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

  Total componentsSurvey components Financial components Other components

Response Rate of Surveys data

   Smoothness MCD Smoothness MCD Smoothness MCD Manufacturing Consumer

    1 2 3 4 5 1 2 3 4 5 1 2 3 4 5    Canada 8   3     1 1     1 2   65%Mexico 7 1 2 1 1     1 1 62%United States 7 1 1     2     3               Australia 7 3     1 1   1 1   60%Japan 7     1 1     2 1 2 98%           Austria 6 2 2     1     1   56% 71%Belgium 6   3 2       1 96% 100%Denmark 8   2 1     1     1 1 2 90% 63%Finland 9   3 1   1 1     2 1   85% 70%France 10   3 1     2 1     2 1 77% 70%Germany 6   2 1 1   1     1   89% 100%Ireland 8   2 2   2     1 1 45% 57%Italy 6   1 2     1     1 1 97% 100%Netherlands 6   3 2   1       80% 70%Norway 7   3     1 1     1 1 80%Portugal 6   1 2   1     1 1 78% 85%Spain 5   2 1   1     1   55% 33%Sweden 9   4     2     1 2 77% 100%Turkey 7   3 1     1   1 1    United Kingdom 7     3 1     2               1 47%  

         Total 142 3 13 36 6 10 3 17 11 0 0 2 6 11 10 14    

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

Business or consumer tendency component with MCD of 4 or 5 or 6Mexico IrelandFinished goods stocks: tendency Finished goods stocks : levelProduction: tendency Employment: tendency Belgium Order books: levelProduction: tendency Consumer confidenceExport order inflow: tendency NetherlandsDenmark Production: future tendencyConsumer confidence Order inflow: tendencyFinland SpainProduction: tendency Order books/demand: tendencyGermany TurkeyOrder inflow: tendency Prospects for exports

United KingdomConsumer confidence

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

The correlation coefficient between smoothness and mean absolute revision of first estimates of the CLIs is rather good

and equals to 0.54. The link is even stronger for second estimates of the CLIs with an extremely high correlation coefficient of 0.82.

The general pattern seems to be: the higher the MCD value the higher the mean absolute revision.

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

The revision analysis on Irish CLI components shows the following:

R2=0.89

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

The revision analysis on German CLI components is:

R2=0. 94

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Investigation on the importance of smoothness of the component series in the size of revisions of CLI

If we plot together Irish and German results we can get the following graph:

R2=0. 85

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END