Wisconsin Leading Indicator Index: Development and Evolution Emily Camfield Wisconsin Department of Revenue November 6, 2009

2 Development Goal: Develop an index of leading indicators specific to the Wisconsin economy Data requirements: Base index on data that –Are reliable –Can be updated monthly –Lead economic activity

3 Challenges Finding enough Wisconsin specific variables that can be used in the index, meeting the desired requirements Benchmarking – what data series to use to gauge troughs and peaks in the Wisconsin economy?

4 Inspiration: Conference Board National Index of Leading Indicators Ten components: –Average weekly hours worked by manufacturing workers –Average weekly initial claims for unemployment insurance –Amount of manufacturers' new orders for consumer goods and materials –Amount of manufacturers' new orders for capital goods unrelated to defense –Vendor performance, slower deliveries diffusion index –Number of new building permits for residential buildings –The S&P 500 stock index –Inflation-adjusted money supply (M2) –Spread between long and short interest rates (i.e. the yield curve) –Consumer expectations

5 Inspiration Iowa’s leading indicator: –Developed by their state revenue office several years ago –Uses state components, similar to those in the national index –Uses a 12-month moving average for all components –More info at:

6 Other State Indicators Texas – published by the Dallas Federal Reserve Philadelphia Federal Reserve – publishes a leading indicator for the states in its district (DE, NJ, PA) Oregon – published by the Oregon Office of Economic Analysis

7 Leading Indicator, Take 1 Components: –Benchmark series (to compare to Leading Indicator Index): Total nonfarm employment, 12-month moving average, seasonally adjusted. –Other series considered: Phil Fed Coincident Indicator for Wisconsin Wisconsin GDP

8 Components Wisconsin Specific: –Wisconsin housing permits –Average weekly manufacturing hours –Wisconsin Trade-weighted value of the Dollar –Employment in Professional & Business Services –Diesel Fuel Consumption –Wisconsin withholding tax revenues –Average monthly Initial Claims National: –Yield Spread –S&P 500 stock market index

9 Components Not Used Sales tax revenues PMI new orders index University of Michigan/Reuters Consumer Sentiment Index Agricultural Prices in Wisconsin –Corn –Dairy

10 Leading Indicator Prior to 2009

11 Six-Month Moving Average

12 Diffusion Index

13 Mid-year, Employment Started to Flatten Out

14 But the Leading Indicator Continued to Decline

15 Revisions to the Index Changed the benchmark series (total nonfarm employment) from a 12 to a 3- month moving average Converted most components of the index from a 12 to a 3-month moving average –Problem: not all data seasonally adjusted –Problem 2: timeliness of data

16 Revised Index Bottomed Out in April 2009

17 Wisconsin Housing Permits Source: U.S. Census Bureau

18 Average Manufacturing Hours Source: U.S. Bureau of Labor Statistics

19 Wisconsin Trade-Weighted Value of the Dollar Source: Wisconsin Department of Revenue

20 WI Emp in Prof and Business Services Source: Wisconsin Department of Workforce Development

21 Diesel Fuel Consumption Source: Wisconsin Department of Revenue

22 Real Withholding Collections Source: Wisconsin Department of Revenue

23 Initial Unemployment Ins. Claims Source: Wisconsin Department of Workforce Development

24 S&P 500 Index Source: Standard & Poor’s

25 Yield Curve Source: Federal Reserve Board

26 Revised Index Using Three-Month Moving Averages

27 6-Month Annualized Change Using Revised Index

28 Diffusion Index Using Revised Index

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