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Composite Leading Indicators

and Growth Cyclesin

Major OECD Non-Member Economies

andRecently New OECD Member Countries

Ronny Nilsson

Statistics Directorate

OECD

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Topics Composite Leading Indicators for Individual Countries

- Evaluation of Indicators (Non-OECD)

- Characteristics of leading indicators

- Cyclical properties of CLIs

Growth Cycles and Reference Series- New and old Reference series for OECD Area and

OECD Europe Area

- New Area Aggregates

- Timing Relationship of Individual Countries with NewArea Aggregates

Composite Leading Indicators for New Zone Aggregates

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Evaluation of Indicators -

Major OECD Non-Member Economies

Methods used to evaluate Cyclical Performance

Turning Point Analysis

- Mean/median lead, standard deviation at turning points,

extra or missing cycles

Cross-correlation Average lead at max correlation

Cross Spectral Analysis

- Coherence (explained variance) and Mean Delay

Dynamic Factor Analysis

- Common component variance/indicator variance,

- Cross-correlation between common components

- Cyclical timing classification (mean delay)

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Criteria used for Timing Classification of

indicators by country and subject area

Cross Spectral Analysis Mean delay

leading= value > 1

NBER Analysis Median lead

leading= > 2 periods

Dynamic Factor Analysis Common component

cross-correlationleading= coef. > 0.50

and positive lag

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Cyclical Evaluation Results by Country

Country Numberof

indicators

tested

Cross SpectralAnalysis

(1)

NBER Analysis(2)

Dynamic FactorAnalysis

(3)

Lead

%

Coin

%

Lag

%

Lead

%

Coin

%

Lag

%

Lead

%

Coin

%

Lag

%

Brazil 21 42.8 52.4 4.8 66.7 9.5 23.8 23.8 76.8 0.0

China 26 7.7 88.5 2.8 50.0 38.5 11.5 0.0 100.0 0.0

India 30 10.0 43.3 46.7 43.3 50.0 6.7 10.0 76.7 13.3

Indonesia 23 17.4 52.2 30.4 56.5 26.1 17.4 30.4 56.5 13.1

Russia 22 50.0 50.0 0.0 72.7 27.3 0.0 27.3 63.6 9.1South

Africa

26 11.5 77.0 11.5 69.2 23.1 7.7 7.7 88.5 3.8

Total 148 21.6 60.8 17.6 58.8 30.4 10.8 15.5 77.7 6.8

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Cyclical Evaluation Results by Subject

SubjectArea

Numberof

indicators

tested

Cross SpectralAnalysis

(1)

NBER Analysis(2)

Dynamic FactorAnalysis

(3)

Lead%

Coin%

Lag%

Lead%

Coin%

Lag%

Lead%

Coin%

Lag%

Tendency

Surveys

50 26.0 68.0 6.0 72.0 22.0 6.0 10.0 84.0 6.0

Real 37 13.5 59.5 27.0 54.0 32.4 13.5 13.5 81.1 5.4

External 33 24.2 54.6 21.2 57.6 30.3 12.1 27.3 66.7 6.0

Financial 28 25.0 57.1 17.9 57.1 28.6 14.3 14.3 78.6 7.1

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Selection of Potential Component Series for

Construction of Composite Indicators

Criteria

Cyclical behaviour at turning points

- median lead

- standard deviation at turning points- number of extra and missing turning points

Practical issues

- timeliness of the latest data available (t+2)

- frequency (delay for timely data, if quarterly frequency)

- smoothness (irregular series (MCD 5 or 6) will imply

revisions due to smoothing)

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Characteristics of Leading IndicatorsGeneral problems

Data Availability restricted to few subject areas andindicators (see table below)

Short time period of available data for many indicators

back to 1990/96 in all countries except Brazil (79), South

Africa (75), New Zealand (80) and China (83)

Frequency of many good indicators is quarterly, thisconcerns most business and consumer tendency series

(South Africa and New Zealand)

Timeliness a particular problem for series with quarterlyfrequency (Brazil, India, South Africa and New Zealand)

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Characteristics of CLIs

Major OECD Non-member EconomiesMedian lead (+) at

turningpoints (TP)

Cross

correlation (2)

Country Starting

date

Extra (x),

missing (m)cycles/

total number

of cycles (1)

Smoothness

MCD/QCD

Peak Trough All TP

Standard

deviation

Lead

(+)

Coef.

All series x, m total

Brazil 1979 2 x 8 1 4 4 4 4.5 2 0.61

China 1983 1m 6 1 3 4 4 6.5 6 0.70

India 1995 0 2 1 1 2 1 0.8 3 0.89

Indonesia 1993 1m 4 1 7 3 7 9.3 3 0.68

Russia 1994 0 2 1 10 10 10 8.8 4 0.72

South Africa 1975 0 6 1 4 6 5 10.3 5 0.73

United States 1955 1m 13 1 7 4 6 3.6 5 0.77

Japan 1959 1x 11 1 9 5 8 5.4 6 0.84

Germany 1961 1x 11 1 7 2 3 4.3 6 0.72

United Kingdom 1972 2 x 8 1 7 6 7 5.0 8 0.66

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Characteristics of CLIs

Recently New OECD Member CountriesMedian lead (+) at

turningpoints (TP)

Cross

correlation (2)

Country Starting

date

Extra (x),

missing (m)cycles/

total number

of cycles (1)

Smoothness

MCD/QCD

Peak Trough All TP

Standard

deviation

Lead

(+)

Coef.

All series x, m total

Korea 1991 0 7 1 9 6 7 3.8 7 0.73

New Zealand 1987 2 x 3 1 5 6 5 6.0 10 0.69Czech Republic 1992 m 5 1 4 4 4 4.6 9 0.59

Hungary 1993 1 m 4 1 7 8 8 7.3 5 0.55

Poland 1993 1 x 4 1 5 10 6 4.2 8 0.64

Slovak Republic 1994 1 m 5 1 6 11 8 4.3 7 0.65

United States 1955 1m 13 1 7 4 6 3.6 5 0.77

Japan 1959 1x 11 1 9 5 8 5.4 6 0.84

Germany 1961 1x 11 1 7 2 3 4.3 6 0.72

United Kingdom 1972 2 x 8 1 7 6 7 5.0 8 0.66

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Characteristics of CLIs for New Countries

Compared to CLIs for Major OECD Countries

General fit (peak-correlation) with reference series israther good for most countries for Eastern Europeancountries a weaker correlation is noted

Median and peak-correlation leads show inconsistentresults for several countries (Indonesia, Russia, NewZealand)

Variability of lead at all TPs as measured by standardvariation is high in several countries (China, Indonesia,Russia, South Africa, New Zealand and Hungary)

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Composite Leading Indicator - Brazil

Brazil: Composite Leading indicator and Industrial production

Ratio to Trend

80

85

90

95

100

105

110

115

120

J an- 75 J an -7 7 J an- 79 J an -8 1 J an- 83 J an -8 5 J an- 87 J an -8 9 Ja n- 91 J an -9 3 Ja n- 95 J an -9 7 J an -9 9 J an -0 1 J an -0 3 J an -0 5

80

85

90

95

100

105

110

115

120

BrazilIIP

BrazilCLI

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Composite Leading Indicator - ChinaChina: Composite Leading Indicator and industrial production

Ratio to Trend

90

92

94

96

98

100

102

104

106

108

110

Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05

90

92

94

96

98

100

102

104

106

108

110

ChinaIIP

ChinaCLI

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Composite Leading Indicator - India

India: Composite Leading Indicator and Industrial production

Ratio to Trend

94

96

98

100

102

104

106

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

94

96

98

100

102

104

106

IndiaIIP

IndiaCLI

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Composite Leading Indicator- Russia

Russia: Composite Leading Indicator and Industrial production

Ratio to Trend

80

85

90

95

100

105

110

115

120

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

80

85

90

95

100

105

110

115

120

RussiaIIP

RussiaCLI

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Composite Leading Indicator South AfricaSouth Africa: Composite Leading Indicator and Industrial production

Ratio to Trend

80

85

90

95

100

105

110

115

120

125

130

Ja n- 75 Jan- 77 Jan-7 9 Jan- 81 Jan- 83 Jan- 85 Jan- 87 Jan-89 Jan-91 Jan- 93 Jan- 95 Jan- 97 Jan- 99 Jan-01 Jan- 03 Ja n- 05

80

85

90

95

100

105

110

115

120

125

SouthAfricaIIP

SouthAfricaCLI

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Composite Leading Indicator Korea

Korea: CompositeLeading Indicator and industrial production

Ratio to Trend

82

87

92

97

102

107

112

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

82

87

92

97

102

107

112

KoreaIIP

KoreaCLI

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Composite Leading Indicator Hungary

Hungary: Composite Leading Indicator and Industrial production

Ratio to Trend

90

92

94

96

98

100

102

104

106

108

110

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

90

92

94

96

98

100

102

104

106

108

110

HungaryIIP

HungaryCLI

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Composite Leading Indicator Poland

Poland: Composite Leading Indicator and Industrial productionRatio to Trend

90

92

94

96

98

100

102

104

106

108

110


90

92

94

96

98

100

102

104

106

108

110

PolandIIP

PolandCLI

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Conclusions

CLI evaluation results encouraging but they are based

on a very short time periodwith only 2 or 3 growth cyclesregistered in all countries (except Brazil)

CLI components restricted to a few subject areas

- financial indicators (> 50% in India and Indonesia)

- tendency surveys (> 50% in Russia and South Africa) Timeliness and revisions is a problem for the calculation

of regular monthly CLIs with quarterly components from

business or consumer tendency surveys

Coverageof component series in OECD databases is acondition for the calculation of regular monthly CLIs

- High share of selected component for several countries

require special data collection arrangements

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New and Old Reference Series for

OECD Area and OECD Europe AreaOECD Total Area: Reference Series, Industrial Production

Ratio to Trend

90

92

94

96

98

100

102

104

106

108

110


90

92

94

96

98

100

102

104

106

108

110

OECDOld

OECDNew

OECD Europe Area: Reference Series, Industrial Production

Ratio to Trend

92

94

96

98

100

102

104

106

108

Jan-62 Ja n-65 Jan-68 Jan-71 Jan-74 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04

92

94

96

98

100

102

104

106

108

OECDEuropeOld

OECDEuropeNew

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New Regional or Area Aggregates

OECD Eastern Europe

- share is 7.5 % of OECD Europe Area- country weights (GDP at PPP) in %, Czech R. 21.1,

Hungary15.8, Poland52.6, Slovak R. 10.5

Major Five Asian Economies

- share is close to 35% of World Proxy- country weights, China 44.4, India 20.9,

Indonesia 4.9, Japan 23.6, Korea 6.2

World Proxy (OECD + major 6 OECD non-members)

- covers 83.1 % of World GDP (OECD 57.1)- country weights, Brazil 3.2, China 15.3. India 7.2,

Indonesia 1.7, Russia 3.0, South Africa 1.1,

United States 25.0, Japan8.1

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Timing Relationship of Individual

Countries with New Area Aggregates

OECD Eastern Europe

- Hungary and Polandcoincident and well correlated

- Czech and Slovak better against Europe as a whole

- Russia shows leading tendency, but weak correlation- no major difference against Europe and Euro Area

Asia Major 5 Area

- China, India and Japancoincident and well correlated

- Koreacoincident, but weak correlation

- Australia, New Zealand and Indonesia show weak or

not significant correlation

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Timing Relationship of Growth Cycles in

Individual Countries with New Area Aggregates

World Proxy (OECD Area + Major 6 OECD Non members)

- China and India show leading tendency against WorldProxy and median leads of 5-3 months against OECD

Area

- Korea and New Zealand show leading tendencyagainst World Proxy and OECD Area, but weakcorrespondence with OECD Area

- Brazil, Russia and South Africa show laggingtendencyand Russia and South Africa also shows weakcorrespondence against World Proxy and OECD area

- Eastern European countries show laggingtendencyand extremely weak correspondence against WorldProxy and OECD Area with exception ofPoland

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Hungary, Poland and

OECD Eastern Europe

90

92

94

96

98

100

102

104

106

108

110

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

90

92

94

96

98

100

102

104

106

108

110

EasternEurope

Hungary

Poland

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Czech R., Slovak R., Russia and

OECD Eastern Europe

85

90

95

100

105

110


85

90

95

100

105

110

EasternEurope

SlovakRepublic

CzechRepublic

Russia

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OECD Europe, Euro Area and

OECD Eastern Europe

94

96

98

100

102

104

106


94

96

98

100

102

104

106

EasternEurope

OECDEurope

EuroZone

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China, India and

Asia Major 5 Economies

92

94

96

98

100

102

104

106

108

110


92

94

96

98

100

102

104

106

108

110

AsiaMajor5

China

India

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Japan, Korea and


80

85

90

95

100

105

110

115


80

85

90

95

100

105

110

115

AsiaMajor5

Japan

Korea

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Australia, New Zealand, Indonesia and


85

90

95

100

105

110

115

120


85

90

95

100

105

110

115

120

AsiaMajor5

Australia

NewZealand

Indonesia

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Timing Relationship of Growth Cycles in New and

Established Area Aggregates against OECD Area

and World Proxy Euro Area/OECD Europe/OECD Eastern Europe

-All European aggregates show a tendency to lag

against both OECD Area and World Proxy

NAFTA (North American Free Trade Area)

- shows a coincident behaviour against both OECD

Area and World Proxy

Asia Major 5 Area- shows a leading tendency against both OECD

Area and World Proxy with clear median lead of 4

months against the OECD Area

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OECD Area, OECD Europe Area, NAFTA

and Asia Major 5 Economies

92

94

96

98

100

102

104

106

108

110


92

94

96

98

100

102

104

106

108

110

OECD

AsiaMajor5

OECDEurope

NAFTA

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World Proxy, OECD Area,

Brazil and South Africa

92

94

96

98

100

102

104

106

108

110

112


92

94

96

98

100

102

104

106

108

110

112

OECDMajor6NME

OECD

SouthAfrica

Brazil

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CLIs for New Area Aggregates

Cyclical Characteristics 1995-2005

World Proxy

- CLI shows a median lead of 2 months and a peak-

correlation of 0.92 at a lead of 3 months

Asia Major 5 Area- CLI shows a median lead of 3 months and a peak-

correlation of 0.85 at a lead of 3 months

OECD Eastern Europe

- CLI shows a median lead of 4 months, but a peak-correlation of only 0.39 at a lead of 7 months

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World Proxy

OECD area + Major 6 NMEs

94

96

98

100

102

104

106


94

96

98

100

102

104

106

OECDBig6IIP

OECDBig6CLI

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92

94

96

98

100

102

104

106

108

110


92

94

96

98

100

102

104

106

108

110

AsiaMajor5IIP

AsiaMajor5CLI

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OECD Eastern Europe

92

94

96

98

100

102

104

106

108


92

94

96

98

100

102

104

106

108

OECDEasterEuropeIIP

OECDEasternEuropeCLI

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Publication and References

http://www.oecd.org/std/cli

Nilsson Ronny and Olivier Brunet, 2006. Composite Leading

Indicators for Major OECD Non-Member Economies: Brazil, China,

India, Indonesia, Russian Federation and South Africa, OECD

Statistics Working Paper STD/DOC(2006)1, available athttp://www.olis.oecd.org/olis/2006doc.nsf/LinkTo/std-doc(2006)1

OECD, 2006. Composite Leading Indicators for Major OECD Non-

Member Economies and Recently New OECD Member Countries,

Unclassified Document available at

http://www.oecd.org/document/60/0,2340,en_2649_34349_36674300_1_1_1_1,00.html
http://www.oecd.org/std/clihttp://www.olis.oecd.org/olis/2006doc.nsf/LinkTo/std-doc(2006)1http://www.oecd.org/document/60/0,2340,en_2649_34349_36674300_1_1_1_1,00.htmlhttp://www.oecd.org/document/60/0,2340,en_2649_34349_36674300_1_1_1_1,00.htmlhttp://www.oecd.org/document/60/0,2340,en_2649_34349_36674300_1_1_1_1,00.htmlhttp://www.oecd.org/document/60/0,2340,en_2649_34349_36674300_1_1_1_1,00.htmlhttp://www.olis.oecd.org/olis/2006doc.nsf/LinkTo/std-doc(2006)1http://www.olis.oecd.org/olis/2006doc.nsf/LinkTo/std-doc(2006)1http://www.olis.oecd.org/olis/2006doc.nsf/LinkTo/std-doc(2006)1http://www.oecd.org/std/cli