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Benchmark Revisions - May 2006

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Released: Thursday, April 13, 2006

* Special Notes:

The next release, scheduled for May 17, 2006, will incorporate two major revisions to the composite index of economic indicators (LEI): 1) a new method for calculating the contribution of the yield spread in the LEI and 2) a trend adjustment to the LEI. The new measure of the yield spread improves the performance of the LEI by better reflecting the way the yield spread anticipates cyclical economic turning points. The trend adjustment facilitates interpretation and use of the LEI.

The new measure of the yield spread, one of the current components of the LEI, uses the same interest rate spread in the calculations. The revision involves a shift from using the yield spread in the LEI to using the cumulative sum of the yield spread. The primary effect of this revision is to change the way the contribution of the yield spread is calculated.

The monthly contribution calculation is based on monthly changes in each component of a composite index. With the revision, the contribution of the yield spread will be calculated from the value of the yield spread in a given month instead of its change over the previous month. Currently, the yield spread contributes negatively - i.e., reduces the growth rate of the index - to the LEI whenever the spread is declining and this happens before recessions, but at many other times as well. The new measure will contribute negatively to the LEI only when the spread inverts; that is, when the long rate is less than the short rate. The cumulative measure of the yield spread provides a less "noisy" leading indicator, one that better reflects the effect of the yield spread on future economic activity.

Next month's revision also institutes an old and well-known trend adjustment procedure to the leading index. This procedure does not affect the cyclical properties of the LEI, but it offers two advantages.

  1. The long-term trend in the LEI will be "fixed" as the procedure equates the trend in the LEI to the trend that is measured by the average growth rate in the coincident index (CEI). This means that the trend of the LEI will not vary with changes in the composition of the index or set of indicators used to calculate it. This facilitates the interpretation of the indexes as cyclical measures and provides a more consistent framework for their use.
  2. The trend adjustment makes the growth of the leading index more similar to that of the coincident index. In turn, the levels of these indexes are more meaningful since the coincident index is a measure of current economic activity. While the composite indexes are mainly used to indicate directional changes in aggregate economic activity, many users also regard them as measures of the level of economic activity. The trend adjustment facilitates this use.

These changes are the result of research at The Conference Board (TCB) and regular consultations with its Business Cycle Indicators Advisory Panel and other experts. The Conference Board continuously monitors the behavior and performance of the composite indexes and their components and makes changes from time to time. This revision is consistent with long-standing TCB policy to make changes to the indexes when research indicates substantial improvements are possible. Because of these revisions, the composite indexes and their monthly changes are no longer directly comparable with previous releases. Similar methodological changes were introduced into the US LEI last year and will be incorporated into the LEIs of other countries covered by the TCB's global indicators program.

In addition, beginning with the May 2006 release, the composition of both the coincident and leading index for France will be revised. Also, the benchmark revisions bring the composite indexes up-to-date with data revisions in their existing components and update the standardization factors used in their calculation. This is a maintenance procedure typically done once a year, which usually does not change the cyclical properties of the indexes and has, as expected, very small effects.

Detailed descriptions and discussion of the changes will be posted on our web site by May 1. Please visit http://www.conference-board.org/economics/bci/ .

The Conference Board reports today that the leading index for France increased 0.5 percent and the coincident index increased 0.1 percent in February.

  • The leading index increased in February, and January's small decline was revised up to a small increase due to data revisions in the new unemployment claims component. With February's gain, the growth rate of the leading index has picked up to about a 0.5 - 1.5 percent annual rate in recent months, but this is still well below the high growth rate of 4.0 percent reached in the second quarter of 2004. In addition, the strength in the leading index has become somewhat more widespread in recent months.
  • The coincident index increased slightly again in February, and it has been on a slightly rising trend since the beginning of 2005. At the same time, real GDP increased at a 2.3 percent average annual rate in the second half of 2005, up from the 0.7 percent average rate in the first half of 2005. The recent behavior in the leading index suggests that the economy is likely to continue growing at a moderate pace in the near term.

LEADING INDICATORS. Seven of the ten components of the leading index increased in February. The positive contributors to the index -in order from the largest positive contributor to the smallest- are building permits (residential), the consumer confidence index (opinion balance), industrial new orders, the stock price index, personal consumption of manufacturing goods, the yield spread, and the inverted new unemployment claims. The inverted bond yield, the ratio of the deflator of manufacturing value added to unit labor cost for manufacturing*, and change in stocks* declined in February.

With the increase of 0.5 percent in February, the leading index now stands at 106.6 (1990=100). Based on revised data, this index increased 0.1 percent in January and increased 0.3 percent in December. During the six-month span through February, the leading index increased 0.8 percent, and six of the ten components increased (diffusion index, six-month span equals 60.0 percent).

COINCIDENT INDICATORS. Three of the four components of the coincident index increased in February. The positive contributors to the index were retail sales, paid employment*, and real imports*. Industrial production declined in February.

With the increase of 0.1 percent in February, the coincident index now stands at 117.2 (1990=100). Based on revised data, this index increased 0.1 percent in both January and December. During the six-month period through February, the coincident index increased 0.5 percent, with three of the four series making a positive contribution (diffusion index, six-month span equals 75.0 percent).

DATA AVAILABILITY. The data series used by The Conference Board to compute the two composite indexes reported in the tables in this release are those available "as of" 10 A.M. ET on April 12, 2006. Some series are estimated as noted below.

NOTES: Series in the leading index that are based on The Conference Board estimates are change in stocks and ratio deflator of manufacturing value added to unit labor cost in manufacturing. Series in the coincident index that are based on The Conference Board estimates are the deflator of real imports and paid employment.

THESE DATA ARE FOR ANALYSIS PURPOSES ONLY. NOT FOR REDISTRIBUTION, PUBLISHING, DATABASING, OR PUBLIC POSTING WITHOUT EXPRESS WRITTEN PERMISSION.

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