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Special Article - Updating the experimental composite leading indicator of the Australian business cycle: September Qtr 2000
MOST RECENT MOVEMENTS
The XCLI continued to decline in the September quarter 2000 (down 0.23) to below zero (-0.03) for the first time since the March quarter 1999. There was a provisional peak in the XCLI in the March quarter 2000 which, based on historical performance, indicates that the GDP business cycle could be expected to peak two quarters later. However, the latest data show a provisional peak in the GDP business cycle also in the March quarter 2000, although this may be revised with future releases of GDP data.
In the September quarter 2000, the largest negative contribution to the change in the XCLI came from the housing finance component (-0.15) while the largest positive contribution came from the job vacancies component (0.04) (see table 2).
1. EXPERIMENTAL COMPOSITE LEADING INDICATOR (XCLI) AND ITS TARGET THE BUSINESS CYCLE IN GDP
Chain volume measure (reference year 1998-99)(a)
2. GDP, Chain volume measure (reference year 1998-99)
The XCLI recorded a trough in the December quarter 1998. This signalled that a trough in the GDP business cycle could be expected to emerge two quarters later, in the June quarter 1999. However, the actual timing of peaks and troughs cannot be identified with certainty until several quarters later. Current data indicate that a trough in the GDP business cycle emerged in the September quarter 1999, three quarters after the trough in the XCLI.
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.
AN ALTERNATIVE REFERENCE SERIES, NON-FARM GDP
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 peak in the XCLI in the September quarter 1997 is reflected five quarters later as a peak in the non-farm business cycle in the December quarter 1998. In the September quarter 1999, the non-farm business cycle recorded a trough. The XCLI, which recorded a trough in the December quarter 1998, led this turning point by 3 quarters.
3. EXPERIMENTAL COMPOSITE LEADING INDICATOR (XCLI) AND THE BUSINESS CYCLE IN NON-FARM GDP
Chain volume measure (reference year 1998-99)(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 September quarter 2000, four of the eight components made positive contributions to the quarterly change in the XCLI (one of which was very small) and four components made negative contributions (Table 2 and graph 4). Graphs 5 to 12 show each component’s trend and historical long-term trend.
4. CONTRIBUTIONS TO QUARTERLY CHANGES IN THE XCLI
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. In the September quarter 2000, the trade factor continued to decline for the third consecutive quarter. The historical long-term trend of the trade factor declined more rapidly than its trend in the September quarter 2000. Consequently, the trade factor component made a positive contribution (0.03) to the change in the XCLI in the June quarter 2000.
5. TRADE FACTOR
United States GDP
The trend of United States GDP continued to rise in the September quarter 2000 although the rate of growth has slowed since the December quarter 1999. The US GDP trend grew slightly slower than its historical long-term trend. The US GDP component made a negligible contribution to the change in the XCLI in the September quarter 2000.
6. UNITED STATES GDP, Chain volume measure (Reference year 1996)
Secured housing finance commitments
The trend of the secured housing finance commitments component continued to decline at an accelerating rate in the September quarter 2000. A large decline in recent months following a peak towards the end of 1999 was mirrored in related series, including dwelling approvals and construction activity. There appears to have been a change in demand patterns brought about by the “bringing forward” of building activity prior to the introduction of the GST on 1 July 2000. In contrast, the historical long-term trend for secured housing finance commitments continued to rise in the September quarter 2000.
The secured housing finance commitments component made a negative contribution (-0.15) to the change in the XCLI in the September quarter 2000, the largest negative contribution to the change in the XCLI of all its components.
7. SECURED HOUSING FINANCE COMMITMENTS
Note that the job vacancies series are referenced to the middle month of a quarter.
The trend in the number of job vacancies continued to rise strongly in August 2000 although at a slower rate than the past few quarters. In contrast, the historical long-term trend has been rising at a steady rate (around 2.5% a quarter) over the last 12 quarters. Job vacancies made a positive contribution (0.04) to the change in the XCLI in the September quarter 2000, the largest positive contribution of all the components of the XCLI.
8. JOB VACANCIES
All Industrials index
The growth rate of the trend of the All Industrials index continued to rise in the September quarter 2000. In the current quarter, its historical long-term trend growth rate declined. As a result, the All Industrials index component made a positive contribution to the change in the XCLI in the current quarter (0.01).
9. ALL INDUSTRIALS INDEX
Real interest rate
The XCLI uses the inverse of the difference between the trend and the historical long-term trend of the real interest rate, lagged four quarters. Therefore, it is the September quarter 1999 movement of the real interest rate that contributes to the September quarter 2000 movement in the XCLI. The real interest rate component (once inverted) made a negative contribution to the change in the XCLI (-0.06) in the September quarter 2000. This was the second largest negative contribution to the XCLI.
In the last issue of the XCLI, the trend of the real interest rate continued to rise in the March quarter 2000. The real interest rate trend began to decline in the March quarter 2000 and continued to fall in the June quarter 2000 although this was not apparent in the previous issue of the XCLI. Over the past two quarters the historical long-term trend of the real interest rate has been declining at a slower rate than the trend. The implication of this relationship is that real interest rates are likely to begin to make positive contributions to the change in the XCLI in the first half of 2001.
10. REAL INTEREST RATE
Production and business expectations
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 September quarter 2000, the trend of the production expectations recovered. As a result of the decline in the trend in the June quarter 2000, this component made a negative contribution (-0.04) to the change in the XCLI in the September quarter 2000 due to lagging.
In the September quarter 2000, the trend of the business expectations continued to decline, although at a decelerating rate. According to the September quarter 2000 Survey of Industrial Trends (by the ACCI and Westpac Banking Corporation), the decline in the trend of the business confidence indicator eased in original terms in the current quarter from the sharp decline in the June quarter 2000. This component made a negative contribution to the change in the XCLI in the June quarter 2000.
Note: The source of these expectations series is the Australian Chamber of Commerce and Industry, and Westpac Banking Corporation, Survey of Industrial Trends. The ABS also compiles business expectations data. However, the ABS data cannot yet be included as a component of the XCLI due to the insufficient length of the time series.
11. PRODUCTION EXPECTATIONS, Trend
12. BUSINESS EXPECTATIONS, Trend
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, (1347.0), June 1993, and in the feature articles published in Australian Economic Indicators (1350.0) in August and October 1992 and May 1993.
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 their contributions 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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