New Composite Indicators Based on KOF Business Surveys Richard Etter, Sibylle Gübeli, Michael Graff November 13, 2007 KOF has a long tradition in the search of coincident and leading indicators The most complex was the KOF Barometer which was revised last year The reaction on this barometer was two-fold: on the one side, professionals appreciated the construction On the other side non-researchers and in paricular the journalists didn‘t understand the method Therefore we developed two simple constructed and one more econometrically oriented indicator

Overview We present three different composite indicators Financial Sector Indicator Without reference series Coincident indicator Business Situation Indicator GDP as reference series Employment Indicator Employment as reference series Leading indicator OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Financial Sector Indicator OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Financial Sector Indicator Aim Situation in the financial sector: There are plenty of monetary indicators but few are value added oriented for the financial sector (banks). The Swiss Federal Statistical Office publishes only yearly data on the „production account“. A quarterly or even a monthly reliable reference series for the value added does not exist Our financial indicator will therefore not be measured or scaled on a reference series We want to find a simple and easy to understand indicator for financial activities which is early disposable The financial sector indicator will be constructed along the following lines Referring only to questions that directly relate to the value added Transparent computation and aggregation Timely provision of information on economic coincident activity of banks Demand is more and more oriented to indicators which provide new information. Qualitative Information on quantitative statistics is not as interesting, in theses cases the quantiative data is prefered OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Selected Items Questions from the business survey of banks KOF Financial Sector Indicator Selected Items Questions from the business survey of banks No screening of the data Three items as candidates that refer to value added on a coincident basis Judgement of the business situation Change in demand Expected change of employment For quantification: traditional balance indicator There is only a minor seasonality but some erratic movements, therefore a low pass filter is applied to separate cycle components from noise Plausible decomposition of the questions on the business situation and on expected employment but not on demand. Therefore, demand will not be considered further OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Aggregation Aggregation procedure: Responses are weighted by employees KOF Financial Sector Indicator Aggregation Aggregation procedure: Responses are weighted by employees Calculation of the balance indicator Arithmetic mean of the low pass filtered balance indicators of the two selected questions Quarterly data of the indicator from 2000Q1 until 2007Q3 OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

First Indication of Performance KOF Financial Sector Indicator First Indication of Performance 60 42'000 40 40'000 20 38'000 36'000 -20 34'000 -40 32'000 -60 30'000 00 01 02 03 04 05 06 07 KOF Financial Sector Indicator Value added banks OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

First Indication of Performance KOF Financial Sector Indicator First Indication of Performance OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Financial Sector Indicator Results and Summary The KOF financial indicator captures the main features of the dynamics that characterise the value added series This is very encouraging. It leads us to conclude that in due time we may be able to refer to a more adequate – quarterly – data corpus with success too OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Business Situation Indicator OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Aim Monthly coincident indicator to GDP quarterly yoy-growth rate KOF Business Situation Indicator Aim Monthly coincident indicator to GDP quarterly yoy-growth rate Data base is the KOF BTS Monthly data: manufacturing and retail trade Balance indicators Low erratic movements  Judgement Item which is easy to understand for the public  Business situation OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Judgement of the business situation KOF Business Situation Indicator Judgement of the business situation Business situation is a common term It goes with the growth-cycle concept Level No trend Natural reference series is the (detrended) GDP-Level, but Best known reference series of the economic development is the yoy-change of GDP Characteristics OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Business Situation Indicator Calculations Answers weighted by employees of the firms for manufacturing and retail separately Stratification by firm-size and weighting according to the universe for manufacturing and retail trade Balance indicator of the two sectors Aggregation of both sectors by employees according to the universe This indicator is compatible with growth-cycles not with acceleration and deceleration Yoy-differences of the aggregated balance indicator Original values as well as smoothed values (trend cycle) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Business Indicator and GDP (original data) KOF Business Situation Indicator KOF Business Indicator and GDP (original data) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Business Indicator and GDP (trend cycle data) KOF Business Situation Indicator KOF Business Indicator and GDP (trend cycle data) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Summary Easy to communicate KOF Business Situation Indicator Summary Easy to communicate High correlation (0.80) with yoy-growth rate of GDP Coincident indicator Monthly data with low erratic movements OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

KOF Employment Indicator (Work in Progress) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Introduction Framework: employment indicator Objectives: Early quarterly signaling of the newest development of the Swiss employment by the use of KOF business surveys Employment as a reference series: Relevant for the business cycle Interesting for economic policy OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Proceedings Introduction Data base Analysis, selection criteria and combinations Results: single indicators From the single to the composite indicators Results: composite indicators Summary OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Data Base: KOF Business Survey Results Business surveys in different Swiss sectors Questions about employment and general situation Earlier development Assessment Expected prospective development Most important analysed transformations Trend cycles Balance statistics Monthly data: Average of three months, values of the 1st, 2nd or 3rd months of a quarter OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Analysis, Selection Criteria and Combinations Reference series: employment growth rate relative to the quarter of the previous year (PY) Correlation Analysis: KOF business survey results (single indicators) and the reference series Selection criteria Economically plausible correlation to the employment growth rate (PY) Strong correlation (maximal Correlation > 0.75) at a Lead of two quarters Combining the selected single indicators > composite indicators Correlation Analysis: composite indicators and the reference series OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Results: Single Indicators >> Correlation of selected single indicators and Swiss employment growth rate (PY) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

From the Single to the Composite Indicators Selected single indicators use information of one sector only Objective: bundle information Bundled information using Principal Components Analysis (common variance) Two reasonable combinations to compare: Combination of the employment-based items (five items) Combination of the employment-based and the business-situation-based items (nine items) >> Two composite indicators OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Results: Composite Indicators >> Correlation of two composite indicators and Swiss employment growth rate (PY) OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Possible Employment Indicators OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Summary Given the Swiss employment growth rate (PY) the composite indicators perform very well: They show a strong correlation They signal turning points in advance Given the selected single indicators the composite indicators are Can be commented comprehensibly because of employment-relevant items of the KOF business survey results Broadly based on items of the different Swiss sectors OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007

Thank You for Your Attention Richard Etter KOF Swiss Economic Institute E-Mail: etter@kof.ethz.ch Tel.: +41 44 632 51 56 Sibylle Gübeli KOF Swiss Economic Institute E-Mail: guebeli@kof.ethz.ch Tel.: +41 44 632 53 60 Free registration for our new monthly newsletter (KOF Bulletin): www.kof.ethz.ch/publications/bulletin/ OECD Workshop on Business and Consumer Tendency Surveys November 13, 2007