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Updating the Experimental Composite Leading Indicator of the Australian Business Cycle: June Quarter 2002
1. EXPERIMENTAL COMPOSITE LEADING INDICATOR (XCLI) AND ITS TARGET, THE BUSINESS CYCLE IN GDP-
Chain volume measure (reference year 1999-2000)(a)
2. GDP, Chain volume measure (reference year 1999-2000)
TABLE 1 XCLI AND GDP CHAIN VOLUME MEASURE (REFERENCE YEAR 1999-2000)
TABLE 2 CONTRIBUTIONS TO QUARTERLY CHANGES IN THE XCLI
In the June quarter 2002, the XCLI rose for the fourth quarter (up 0.14 to 0.36). The XCLI showed a provisional turning point at March quarter 2001. Based on historical performance a trough in the GDP business cycle may be expected to emerge several quarters later. However, the GDP business cycle is also exhibiting a trough in March quarter 2001.
In the June quarter 2002, the series that gave the largest positive contribution was job vacancies (0.07) while the largest negative contribution to the change in the XCLI came from the S&P/ASX 200 Industrials Index series (-0.09).
The growth in GDP trend slowed continually from the December quarter 1999 (when it grew by 1.1%) to the December quarter 2000 (0.2%). Since December quarter 2000 GDP grew for two consecutive quarters at an increasing rate, with growth of 1.0% in the June Quarter 2001. Since then the quarterly growth rate has been at 1.0% or slightly higher. The growth of the historical long-term trend was 0.6% in the March quarter 2002. This rate of growth has been slowing since the peak of 1.2% in March quarter 1998.
THE REFERENCE SERIES, GDP
The reference or target series for the XCLI is the GDP business cycle in Australia. The business cycle of a series is defined as the deviation between the trend and the historical long-term trend in the series. Graph 1 shows the business cycles in GDP and the XCLI. Graph 2 shows the level of trend GDP compared with its historical long-term trend. When the trend is below the historical long term trend the GDP business cycle shown in Graph 1 is negative.
TURNING POINTS THE XCLI HAS HAD TROUBLE PREDICTING
In the December quarter 1995, there was a peak in the business cycle which the XCLI failed to predict. This peak was largely attributable to the effects of a good farm season. The XCLI does not contain an indicator which leads first order farm product effects. In recognition of this, Graph 3 presents an alternative target series, namely, the business cycle of non-farm GDP, chain volume measure.
The XCLI peaked in the December quarter 1999. Based on historical performance, the non-farm GDP business cycle may have been expected to peak two quarters later. However, the non-farm GDP business cycle peaked one quarter later in the March quarter 2000.
The XCLI has been experiencing a decline in the lead time of predicting turning points in the GDP Business cycle. The past four turning points in the Business cycle have been predicted by the XCLI but the lead time to the corresponding turning point in the business cycle has been decreasing.
3. EXPERIMENTAL COMPOSITE LEADING INDICATOR (XCLI) AND, THE BUSINESS CYCLE IN NON-FARM GDP
Chain volume measure (reference year 1999-2000)(a)
ANALYSIS OF COMPONENT INDICATORS
The XCLI summarises the business cycles present in a selection of economic indicators which had typically shown turning points ahead of the business cycle in GDP from the early 1970s to the early 1990s. Because the evolution of each expansion and contraction in activity presents a unique combination of features, none of the individual component indicators has had an unvarying or perfectly stable leading relationship with GDP. However, when combined to form the XCLI their performance as a group is more stable.
In the June quarter 2002, six of the eight components made positive contributions to the quarterly change in the XCLI and two made negative contributions (Table 2 and Graph 4). The XCLI has risen from the previous quarter. Graphs 5 to 12 show each component’s trend and historical long-term trend.
Positive contributions. The components making significant positive contributions to the quarterly change in the June quarter 2002 XCLI were job vacancies (0.07, Graph 8), trade factor (0.06, Graph 5), production expectations (0.06, Graph 11), US GDP (0.04, Graph 6), business expectations (0.02, Graph 12) and real nterest rates (0.01, Graph 10).
Negative contributions. The components making negative contributions to the quarterly change in the June quarter 2002 XCLI were the S&P/ASX 200 Industrials index (-0.09, Graph 9) and housing finance commitments (-0.04, Graph 7).
4. CONTRIBUTIONS TO QUARTERLY CHANGES IN THE XCLI
5. TRADE FACTOR
The trade factor is defined as the ratio between commodity prices in terms of Special Drawing Rights and the price index for imported materials used by Australian producers. This ratio gives an early indication of changes in the terms of trade. The trend of the trade factor has risen for the latest five quarters, while the long-term trend has risen slightly. The trade factor component made a positive contribution (0.06) to the change in the XCLI in the June quarter 2002, and made its last negative contribuition in the December quarter 2000. If the trend series rises again in the September quarter then the long-term trend series will also continue to rise.
United States GDP
6. UNITED STATES GDP, Chain volume measure (Reference year 1996)
The US GDP component made a positive contribution (0.05) to the change in the XCLI in the June quarter 2002. This is the third quarter of positive contributions. The trend of the United States GDP grew in the June quarter for the fourth consecutive quarter. The rate of growth of the long term trend has decelerated since the June quarter 1998 and the trend of the US GDP fell below its long-term trend in the March quarter 2001.
Secured housing finance commitments
7. SECURED HOUSING FINANCE COMMITMENTS
The trend of the secured housing finance commitments rose slightly in the June quarter 2002. The historical long-term trend for secured housing finance commitments also continued to rise.
Since the long-term trend grew faster than its trend in the June quarter 2002, the secured housing finance commitments component contributed negatively (-0.04) to the change in the XCLI in the current quarter. This is the third quarter of negative contribution to the CLI. If the trend continues to grow at a rate slower than the long term trend in the September quarter than the series will make another negative contribution to the CLI.
Note that the job vacancies series are referenced to the middle month of a quarter.
8. JOB VACANCIES
The job vacancies trend rose in May 2002 (4.7%). This is the third quartererly rise in this series following five quarters of decline. The long-term trend has been falling for nine quarters and in May 2002 it fell by -1.1%. As a consequence job vacancies made a positive contribution (0.07) to the change in the XCLI in the June quarter 2002.
S&P/ASX 200 Industrials index
9. S&P/ASX 200 INDUSTRIALS INDEX
The Australian Stock Exchange (ASX) has ceased producing the All Industrials index. Instead they are now producing the S&P/ASX 200 Industrials index. This series has a similar business cycle to the All Industrials index and has been used to replace the All Industrials index in the compilation of the XCLI.
In the June quarter 2002, the trend of the S&P/ASX 200 Industrials Index fell (-2.6%) and its long-term trend rose (0.8%). Accordingly, the All Industrials Index made a negative contribution (-0.09) to the change in the XCLI in the
June quarter 2002.
Real Interest Rate
10. REAL INTEREST RATE
Note: The real interest rate is defined as the difference between nominal interest rates and the change in the domestic final demand chain price index.
The XCLI uses the inverse of the business cycle in the real interest rate, lagged four quarters. Therefore, it is the June quarter 2001 movement of the real interest rate that contributes to the June quarter 2002 movement in the XCLI. The real interest rate component made a negligible contribution (0.01) to the change in the XCLI in the June quarter 2002. This follows five quarters of positive contributions to the XCLI.
The trend of the real interest rate rose in the March quarter 2002 following a rises in the September and December Quarters 2001. The long-term trend continued to decline over the period.
It is the movements in the trend and long-term trend series in the June quarter 2001 that contribute to the June 2002 XCLI, hence the movements in the September quarter 2001 mean the real interest rate component should make a negative contribution to the change in the September quarter 2002 XCLI.
Production and business expectations
11. PRODUCTION EXPECTATIONS, Trend
12. BUSINESS EXPECTATIONS, Trend
Note: These components are lagged one quarter in the compilation of the XCLI. Like other XCLI components, the production expectations and business expectations series have been smoothed and standardised to display cyclical behaviour. However, these series are not considered to exhibit long-term trend growth.
In the June quarter 2002, the trend of production expectations rose for the fifth consecutive quarter. According to the Survey of Industrial Trends (produced by ACCI and Westpac Banking Corporation), production expectations in original terms were up strongly in June quarter 2002. Because this component is lagged one quarter, it was the rise in the March quarter 2002 that made a positive contribution in the change in the XCLI in the June quarter 2002 (0.06). This component is expected to also make a positive contribution for the September quarter 2002.
In the June quarter 2002, the trend of business expectations rose. This rise follows rises in the previous five quarters. According to the June quarter 2002 Survey of Industrial Trends there was a rise in business expectations in original terms. Because this component is lagged, it was the increase in business expectations in the March quarter 2002 that made a positive contribution to the change in the XCLI in the June quarter 2002.
Note: The source of these expectations series is the Australian Chamber of Commerce and Industry, and Westpac Banking Corporation, Survey of Industrial Trends.
LONGER TIME SERIES AND FURTHER DETAILS
Details of the compilation of the XCLI index can be found in An Experimental Composite Leading Indicator of Australian Economic Activity, (ABS Cat. no. 1347.0), released in June 1993, and in the feature articles published in Australian Economic Indicators (ABS Cat. no. 1350.0) in August and October 1992 and May 1993.
Longer time series of the data presented in this XCLI article are available on AUSSTATS. For further information about these statistics please contact Jo Jackson on Canberra (02) 6252 6114.
The unit of measurement varies between XCLI components. For example, the real interest rate is measured as a percentage, job vacancies as a number, United States GDP in dollar terms and the trade factor is measured in index number form. Each component is therefore standardised to make its contribution to the XCLI comparable.
The standardisation procedure gives each XCLI component an average value of 1. The variation of each component about its average is also standardised, so that the average deviation also equals 1. Chain volume GDP (the reference series) is also standardised in the same way.
Graphs 1 and 3 use the standardised forms of the XCLI, GDP and non-farm GDP series. The graphs show the deviation of the standardised series from their respective historical long-term trends. Because of the standardisation procedure, the deviation measure has no particular unit (i.e. it is not measured in dollars, or percentage change, or any other real world unit).
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