RDP 9102: Indicators of Economic Activity: A Review 1. Introduction

An important problem in monitoring and forecasting the real economy is the lag in availability of relevant data. For example, the national accounts, which in principle summarise much of the information of importance on the macro-economy, are generally published with lags of three to four months (measured from the mid-point of the quarter to which they refer); moreover, these series are inaccurately measured and often subject to substantial revision, effectively lengthening the information lags even further.

One response to such information problems is the leading index approach. This aims essentially at constructing a composite index of available partial indicators which has, in some statistical sense, optimal properties in leading the cycle. Two such indexes are currently published in Australia.^[1] In practice, however, most economic commentators follow the more pragmatic approach of directly monitoring a wide variety of partial indicators which are thought to contain leading information, or are available with relatively short lags. Implicitly, this information is then combined with rules of thumb and simple statistical techniques to draw conclusions about the economic cycle.

The purpose of this paper is to review the performance of some of the main indicator variables that are typically used in this way. In order to do so, the paper classifies the various indicators into two groups. In the first group are the major expenditure aggregates from the quarterly national accounts, while the second group consists largely of partial indicators which are thought to contain useful information about particular variables from group one. Using this classification, the paper addresses two sets of issues: first, the extent to which each of the expenditure aggregates included in group one can be said to lead or lag real GDP; and second, the forecastability of particular expenditure aggregates using information contained in the relevant partial indicators.

Footnote

The Westpac-Melbourne Institute Index of leading indicators, and the NATSTAT index, published by the State Bank of Victoria. For an exposition of work on the Westpac-Melbourne Institute index, see Boehm and Martin (1987). The properties of these indexes were studied by Trevor and Donald (1986) and EPAC (1985). [1]