9 th Euroindicators Working Group Luxembourg, 4 th & 5 th December 2006 Eurostat - Unit D1 Key Indicators for European Policies

Item VI - 3 of the Agenda Flash Estimates By Martin Weale Doc 188 / 06 National Institute of Economic and Social Research

Purpose  To use statistical forecasting techniques to produce estimates of key economic variables faster than is currently done.

Variables VariableCurrent Lag (days) US Lag (days) Industrial Output Price Index Industrial New Orders Index Construction Output7431 Employment (quarterly) Industrial Turnover

Methodology (1)  Use indicator variables  Rely on regression equation  Do not expect a stable relationship  Use statistical criteria to choose the regression equation  Avoid long lags  Avoid judgement (except in choice of indicators)

 Look at all possible regression equations  Choose equation on the basis of the Bayesian Inference Criterion.  This adjusted the standard error for degrees of freedom.  It tends to select parsimonious specifications.  The methodology is appropriate to a statistical office because it is based on statistics rather than economics. Methodology (2)

The General Regression Equation Avoid exploring co-integrating relationships because they can generate long lags. Forecast only 1 period ahead Four variables and two lags creates a very large number of possible equations. We limit ourselves to those containing no more than four variables plus the constant. There are 562 such equations. In real time we review the choice annually.

Data Specification  Use seasonally adjusted data for construction output, new orders and turnover.  Raw data are used for the output price indices  No adjusted employment data are available

Output Price Index New Orders Index Construction Output EmploymentIndustrial Turnover Survey HICPUnemp. Oil Price Trade unit values lagged Flash price index Indicators

Unsuitable Indicators  Data on construction permits and construction new orders lag the construction index substantially.

Results Euro Area

Turning Point Tests and Stability

Results EU25

Turning Point Tests and Stability

Industrial Turnover

Turning Point Tests and Stability

Current Models Variable Industrial Output Price IndexBusiness Survey Industrial New Orders IndexAR(2) Construction OutputAR(2) Employment (quarterly)Unemployment Industrial TurnoverOutput price, lagged turnover

Timing VariableCurrent Lag (days) Flash timing Industrial Output Price Index336 Industrial New Orders Index546 Construction Output746 Employment (quarterly)10436 Industrial Turnover6

Conclusions  Except in the case of employment, the models we find are at best only slightly better than autoregressions.  This may limit the use of other flash indicators or point to the need for work to be done by national statistical offices.