Business Cycle Tracer revisited ECFIN Workshop november 2012

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Business Cycle Tracer revisited ECFIN Workshop, november 2012 Erik Slentoe Statistics Denmark

Business Cycle Tracer revisited ECFIN Workshop, november 2012 Erik Slentoe Statistics Denmark

Composite Confidence Indicator • Traditional Composite Confidence Indicator for industry • Boom and recession

Composite Confidence Indicator • Traditional Composite Confidence Indicator for industry • Boom and recession periods shows during time 2 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

 • • A tool to analyze and illustrate economic cycles in business Read

• • A tool to analyze and illustrate economic cycles in business Read counter clock wise Light blue 2005 – 2008 - dark blue 2009 to present 4 quadrants: above/below trend and increasing/decreasing 3 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Construction the Business Cycle Tracer is a 2 -step procedure: 1) Generating a indicator

Construction the Business Cycle Tracer is a 2 -step procedure: 1) Generating a indicator for the graph 2) Construction the graph First about the construction the graph Follows the method used by ECFIN version developed by Christian Gayer about 2007 (? ). Based on method developed by IFO, Germany. Also used by e. g CBS, OECD and others. 4 4 3/12/2021

Construction principle: Business Cycle Tracer konjunkturværdi Indicator value Konjunkturindikator Indicator value Konjunkturbarometer Confidence Indicator

Construction principle: Business Cycle Tracer konjunkturværdi Indicator value Konjunkturindikator Indicator value Konjunkturbarometer Confidence Indicator y x 2012 M 01 2011 M 07 2011 M 01 2010 M 07 2010 M 01 2009 M 07 2009 M 01 2008 M 07 2008 M 01 2007 M 07 2007 M 01 2006 M 07 2006 M 01 2005 M 07 2005 M 01 x mth-to-mth changes • y-value is transferred directly • x-value is increase/decrease in y values: yt – yt-1 • Dots on curve marks months 5 5 3/12/2021

 • Data is smoothed with Hodrick Prescott filter (lambda 69) (minimizing problem: fit

• Data is smoothed with Hodrick Prescott filter (lambda 69) (minimizing problem: fit to data vs smooth data) 6 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Turning point problem May 2009 7 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov.

Turning point problem May 2009 7 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

May 2009 8 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

May 2009 8 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

The turning point issue is a draw back and limit the use of the

The turning point issue is a draw back and limit the use of the graph. Developing a method to minimize revision-surprises is desirable. 9 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Sensitivity illustration helps ”forecast” reading Dotted lines indicates development if x-value of present month

Sensitivity illustration helps ”forecast” reading Dotted lines indicates development if x-value of present month was either plus or minus std. dev. of the x-time series. 10 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Contructing the Business Cycle Tracer is a 2 step procedure: 1) Generating a indicator

Contructing the Business Cycle Tracer is a 2 step procedure: 1) Generating a indicator for the graph 2) Construction the graph Now about generating the underlying indicator for the graph 1111 3/12/2021

Instead of Composite Confidence Indicator is generated a “confidence value” based on Principal Component

Instead of Composite Confidence Indicator is generated a “confidence value” based on Principal Component Analysis Composite confidence indcator 12 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012 Confidence value (PCA)

By PCA-analysis is generated one new variable from a number of variables Original variables

By PCA-analysis is generated one new variable from a number of variables Original variables (x, y) highly correlated New variables (p, q) Transforming data into a new coordinate system (p, q) p accounts for most of the variance in data q accounts for almost nothing – can therefore be discharged 13 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Method works because the basic indicators normally are highly correlated. However this is not

Method works because the basic indicators normally are highly correlated. However this is not the case for Denmark regarding the Industry sector (manufacturing) Production, developed Export order books Production, expectations Overall order books Stock of finished products is omitted from the new variable 14 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Original variables (x, y) not correlated New variables (p, q) Both p and q

Original variables (x, y) not correlated New variables (p, q) Both p and q accounts for the variance in data 15 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

Principalkomponentanalyse (PCA): KBI Variabel PC 1 -loadings Production, developed Overall order books Export order

Principalkomponentanalyse (PCA): KBI Variabel PC 1 -loadings Production, developed Overall order books Export order books Stock of finished products Production, expectations 0, 93 0, 95 -0, 08 0, 80 Explanation (of total varians) 66% 16 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

PCA generated variable seems a statistical better ”composite indicator”, than tradition Composite Confidence Indicator

PCA generated variable seems a statistical better ”composite indicator”, than tradition Composite Confidence Indicator (simple average), however, as shown, it has its pitfalls. The information if the basis-indicator ”Stock of products” is omitted, although it might be the first indicator to notice about changes. 17 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

All in all an interesting and visual appealing graph 18 Erik Slentoe, Statistics Denmark,

All in all an interesting and visual appealing graph 18 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012

end References Die ifo Konjunkturuhr: Zirkulare Korrelation mit dem Bruttoinlandsprodukt http: //www. cesifogroup. de/pls/guest/download/ifo%20

end References Die ifo Konjunkturuhr: Zirkulare Korrelation mit dem Bruttoinlandsprodukt http: //www. cesifogroup. de/pls/guest/download/ifo%20 Schnelldienst%20201 0/ifosd_2010_5_4. pdf Gayer, Christian (2007). The Economic Climate Tracer A tool to visualise the cyclical stance of the economy using survey data http: //www. oecd. org/dataoecd/12/47/39578745. pdf van Ruth, Schouten and Wekker (2005) : The Statistics Netherlands’ Business Cycle Tracer. Methodological aspects; concept, cycle computation and indicator selection http: //www. cbs. nl/NR/rdonlyres/253 FD 272 -B 93 E-46 FF-A 4741 E 5 A 396 C 81 F 1/0/2005 methodebusinesscycletracerart. pdf 19 Erik Slentoe, Statistics Denmark, ECFIN Workshop, Bruxelles Nov. 2012