1. 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

2. 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

3. KOF Financial Sector Indicator
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November 13, 2007

4. 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

5. 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
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November 13, 2007

6. 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

7. 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

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

9. 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
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November 13, 2007

10. KOF Business Situation Indicator
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November 13, 2007

11. 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
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November 13, 2007

12. 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

13. 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)
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November 13, 2007

14. 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

15. 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

16. 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
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November 13, 2007

17. KOF Employment Indicator (Work in Progress)
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November 13, 2007

18. 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
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November 13, 2007

19. 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

20. 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

21. 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
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November 13, 2007

22. Results: Single Indicators
>> Correlation of selected single indicators and Swiss employment growth rate (PY)
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November 13, 2007

23. 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
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November 13, 2007

24. Results: Composite Indicators
>> Correlation of two composite indicators and Swiss employment growth rate (PY)
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November 13, 2007

25. Possible Employment Indicators
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November 13, 2007

26. 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

27. Thank You for Your Attention
Richard Etter
KOF Swiss Economic Institute
Tel.:
Sibylle Gübeli KOF Swiss Economic Institute Tel.:
Free registration for our new monthly newsletter (KOF Bulletin):
OECD Workshop on Business and Consumer Tendency Surveys
November 13, 2007