Do leading indicators say

something useful about our

future economic growth?

Group 9:
Abhinav Bura (PGP/21/125)
Ajitesh Kumar (PGP/21/130)
Mahak Malhotra (PGP/21/154)
Mohit Mishra (PGP/21/156)
Nirdesh Kumari (PGP/21/161)
Rishav Sharma (PGP/21/172)
Shirley Joshua (PGP/21/368)
 QUESTIONS ANSWERED:

1.What are leading indicators?

2. How are leading indicators useful for
assessing a countrys vulnerability?
3. What do leading
indicators forecast in
India?
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INTRODUCTION
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What are leading indicators?

Leading indicators are measurable economic factors that can predict what will happen in
the economy. Leading indicators are, by definition, backed by solid economic theory and
tested by performance. In practice, composite leading indicators are used for any policy
decision making since composite scores will be more reliable than any individual leading
indicator movement. For example, stock market prices, avg. workweek etc.

Origin of leading indicators?

NBER in late 1930s OECD in 1970s

One of the earliest research in the study
of economic fluctuations using leading,
coincident and lagging indicators was
undertaken by the National Bureau of
Economic Research (NBER) in US in the
1930s right after the Great Depression.
Since 1961, these indicators are tracked
regularly with timely revisions.
In late 1970s, Organization for
Economic Co-operation and
Development (OECD) set up a working
party to develop similar analysis based
on selected economic indicators to
monitor the expected, current and
lagging state of the economy.
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Methodology of indicator analysis - NBER

Develop a trend-adjusted Select a set of leading Calculate composite Test leading indicators
business cycle indicators score in other geographies

First, a robust growth A set of leading indicators A composite score The leading indicators
cycle chronology was were selected basis calculated basis were tested for
developed to measure different business individual leading performance and accuracy
relative economic activity processes (See Table, indicators is generated in other geographies
by eliminating long-term slide 7) and tested for
trends. performance in US

Methodology of indicator analysis - OECD

OECD uses the time series of a mix of individual components to arrive at a CLI (Composite Leading Indicator)for
an economy. The components of OECD CLIs:
- measure early stages of production,
- respond rapidly to changes in economic activity,
- are sensitive to expectations of future activity or
- are control variables that measure policy stance
Individual components, then, undergo filters like seasonal adjustment, outlier detection, long term-trendremoval,
smoothing & normalization to set up an accurate baseline for impact on economicactivity.
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Why are leading indicators important?

Policymaking: Policymakers use leading indicators to implement programs and measures to

avoid negative consequences of economic events to the extent possible.

Predicting market trends and impact on Investment: Investors will use leading indicators
to assess the performance of overall economy, or of special sectors of interest to safeguard
investment. Since the govts monetary policies maybe heavily impacted by CLIs, investors
can predict the government policy action & take appropriate measures.

Monitor growth cycles developments across nations: Leading indicator indices can be a
useful measure to assess the growth cycles for countries (contraction, expansion, recovery).
Also, leading indicators can be used to predict the growth of economic activity, like exports
and imports (by weighting the indices with exports of a country)

Sequential signal system for identifying start and ending of recessions: Compare target
growth rates with current rates basis leading indicators to trigger signals in 3 sequences:
preliminary, intermediate and final. The signals can trigger certain policy actions such as
release of government funds for public employment. Signals of recovery of economy would
be equally important to allow anti-recession policies to be terminated.
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Why are emerging markets not convinced by the idea of

leading indicators?

Predominance of agriculture: This make the business cycle more dependent on

the weather changes than cyclical fluctuation in the non-agricultural production
processes.

Poor quality and frequency limitation of economic data: Due to lack of

infrastructure and processes, critical data is either missing or not gathered at
desired frequency

Predisposition to sudden crises and volatility in macroeconomic variables:

Due to non-strict economic relationships & small base, emerging markets have
predisposition for sudden volatility in economic variables. Rand & Tarp (2001)
proved business cycles in emerging markets are of shorter duration & speed from
one cycle to another is faster.
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Detailed Leading Indicators

Economic Process Leading Indicator

Employment and unemployment Avg. work week (manufacturing), New
unemployment insurance claims inverted
Production, income, consumption and New orders (consumer goods and
trade materials)
Fixed capital investment Formation of business enterprises,
contracts and orders (plant and
equipment), Building permit (housing)
Inventories and inventory investment Change in business inventories
Prices, costs, and profits Industrial materials price index, Stock
price index, Profits, Ratio: price to unit
labor cost nonfarm
Money, credit and interest rates Change of consumer instalment debt
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POPULAR LEADING INDICATORS

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Manufacturing
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Manufacturing as a leading indicator

The major activities involved in manufacturing are goods produced by various
industrial firms like mines, factories, electrical utilities, businesses of newspapers,
magazines, book publishing etc.

Low manufacturing can lead to recession through a complete formation of cycle.

Healthy manufacturing and corresponding consumption shows that the economy
of the country is boosting.
If there are some new products that are manufactured, it can create a demand for
variety of new skills in the market which can improve the employment rate of the
country.

The impact that manufacturing will put onto GDP varies from country to country.
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Impact of Manufacturing
The ways in which manufacturing impacts economy can be amongst these:
- Production levels
- Employment
- Average weekly hours
- Inventory
- New orders
- Supplier delivery rate

This activity also has spillover benefits as when new goods are manufactured, more
workers are needed. This leads to an increase in the employment of the country.
Increased employment leads to wellness in the country. This wellness has other
qualitative benefits to a country in addition to improving the GDP of the economy.
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Manufacturing in India
After the election of Modi Government in 2014, various pushes by Govt. such
as Make in India have improved the levels of manufacturing in the country.
However, the various decisions of Govt. such as Demonetization, Goods and
Services Act(GST) have negatively impacted the manufacturing sector.
In the last few months, Manufacturing Purchasing Managers India (PMI) has
been increasing.
The Govt. is trying to push manufacturing by favorable economic policies,
better market conditions, advertising along with various new product
launches.
Taking into consideration all these factors, increase in manufacturing
indicates GDP of India increasing and evolving into a better and healthier
economy.
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Inventories and Inventory Investments

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Change in business inventories - How good it acts as a macroeconomic

Leading Indicator
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Changes in the inventory is a very small component in the GDP, but it is an

important signal of future economic activity
Changes in inventory signals a change in the future aggregated demand
hence a good indicator of future economic activity.

Lets see the effects of the changes in inventories in 2 ways.

Increase

Undesired decrease in inventories

Undesired increased in Business
inventories means that the
businesses are unable to sell the
goods that they have stocked
Signals a decrease inAggregate
Demand
Businesses respond to reduced
consumption by reducing the
orders from Production
Reduction in Production/ Output
leads to layoffs and unemployment
GDP Growth rate falls and if
means that the businesses are
unable to meet the demands of the
consumers
Signals an increase in the
Aggregate Demand
Businesses respond by increasing
the production and hiring more
workers
Reduction in unemployment and
increase in Output
But there is also a threat of cost-
push and demand pull inflation due

Decrease
severe leads to recession to high increase in demand and
pressure to increase prices
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Does this Indicator always predict correctly ?

These indicators predict future economic activities based on patterns and

should be considered in aggregate. These are not always accurate
But changes in inventories have given right signals of the economy most
of the times.
In cases where Imports fill up the share of inventory needs, any changes
in the domestic business inventories do not have much effect on the future
economy
Wrong demand forecasts may also lead to misleading signals through this
indicator
The changes in the business inventories are forecasted as an average of
the overall changes which leaves more scope for erroneous forecasts.
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Changes in Business inventories prediction- India

According to Indian statistics the changes in the inventories as of September
2017 is 770 INR Billion as compared to previous quarter of 740 INR Billion
The production of Car has also reduced by around 10%
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Stock Price Index

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Stock price Index- How good it acts as a macroeconomic Leading Indicator

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The stock market has always been traditionally viewed as a "predictor" or

indicator of the economy.
It is believed by many that if the prices on stock market reduce by a large
amount, it gives a picture of the probable recession in the economy and vice
versa.

Theoretical reasons why stock price index can predict future economic activities.

Traditional valuation model of stock Wealth Effect

Done by forecasting the cashflows or
dividend that a stock will generate.
Cashflows are discounted at the
weighted average cost of capital to the
present value.
Thus, the value of the stock inherently
captures the future of the economy.
Champions that the prices in the stock
market actually lead the economic
activities.
When stock prices increase, wealth of
the investors rises, their spending
increases there by increasing the
economic activities.
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Does this Indicator always predict correctly ?

It is not that stock market has always acted as a perfect indicator

Case of Stock market Crash-1987
In Oct,1987 the stock prices all over the glove crashed.
It gave an indication of upcoming recession
The stock prices on FTSE 100 index is shown below which
indicates the prices of the index for a period of one year:
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Results after crash

However, the economy didnt follow the expected behaviour.
The below figure indicates the economy of the United states during the
before, during and after this period.

we can clearly see from fig.1 that, in between 1986 to 1987, there has been a
growth in both Service and manufacturing services which contradicts the
prediction made from the stock market crash.
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Stock market Prediction about Indian Economy

According to Livemint an organisation that talks about stock markets,
Indian stocks are expected to hit a high further over the next year.
Indian shares are performing really good among the global stocks but the
economy is growing slowly since the mid way of 2016.
The BSE Sensex, is forecasted to add another 3% by the end of the current
year and is already up by 18%.
The Sensex has been forecasted to rise to a value which is record high of
34,000 by the middle of next year and then subsequently to 35,000 by the
end of 2018.
These values indicate a greater level of economic activity and look forward
for higher profitability.
However, the major shocks that were introduced by the government during
the last year have still their impact on the economy which has added to the
uncertainty of the prediction of the economy future course.
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Converting the above text to graphs:

Below is the world banks prediction of
Below is the current stock price index Indias Growth
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Producer Price Index:

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It is the weighted index of prices measured at the industrial level which

includes the industries of the economy producing the physical goods but
excludes the imports.
It measures the average change in selling prices received by the industries.
It acts as a leading indicator of the ultimate price change that happens as at
the consumer level.
It also provides investors, strategists and businessmen, the indication about
the various prices at different production stages.
Positive correlation CPI of India
PPI of India
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Consumer Credit
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Consumer Credit : How does it act as a leading indicator

Consumer Credit: It is defined as the debt the consumer incurs while purchasing any kind of
goods and services. It can be classified into two parts:
1. Revolving credit: In revolving credit the consumer is allowed to withdraw funds whenever
is required by paying a certain amount of fees.
2. Installment credit: In installment credit the amount borrowed is paid in the regular
instalments which includes the interest and portion of the principle and eventually the full

payment, thereby ending the credit cycle

It facilitate the lead in the retail purchase making consumer less dependent on the income, which
will drive the overall consumption as a result increase in the GDP of the economy.
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It is a very important part in helping people to soothe

their income and provide them more availability towards
the provision of the credit.
Debt arises due to the certain circumstances and high
level of accumulated debt. Low saving, high debt to
income (D/I) ratio and increased income volatility has
led to the problem of debt occurring.

Figure shows the growth rate of the loans even though lending rate was slowed down to zero but the
economy had picked up after first few quarters and the patterns were quite moderate during the period
1990 to 2001 recession.
In contrast with the 2007 recession the growth has reduced drastically during the recession and remains
negative for almost the next four years
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Figure 3A shows a percentage of demand for the

business and consumer loans during the two recession
of 2001 and 2007-09.
It has been perceived that there is a substantial
decrease in the demand for the business loans during
both the periods with a falloff in the demand

It is perceived about the demand of consumer in 2007-

09 recession as much weaker and that weaker demand
to be more prolonged than in the 2001 recession.

Comparing both the surveys help to conclude that the

bank lending has been reduced due to sharp decline in
the demand and supply
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Prediction about Indian Economy

TransUnion CIBIL the financial system has seen a
rebound in the growth rate of consumer credit just after
the month of note ban which includes the loan for
vehicles, education , homes and other credit products.

Credit growth including bank , corporate bonds and

NBFC loans has been 15% in FY17, while bank
loans alone grew only by 9%
The real growth in credit demand is quite in line
with nominal GDP growth and the 70% capacity
utilization levels in Indian industry.
Graph indicate a strong rebound in
demand for loans from individuals
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Sectors which has experienced the stable performance

with the improvement as compared to the past YOY
performance are as follows:

Automobile: With the increase in the disposable

income and consumer confidence there has been seen
a strong growth towards the automobile sector .

Figure shown depicts the sale in the automobile sector in

1993 and the forecasted sales for the year 2020.

From the trends we can also infer that auto

sector in the India is experiencing a huge growth and
growing at a CAGR of 10.5 %.
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Real estate: Real estate is one of the second most largest

employee sector in India after agriculture. Indian real
estate has attracted $32 billion in private equity(PE) .

Rapid urbanization and increase in the disposable

income amongst the consumer are one of the major
indicators for increasing the growth in this sector.

RERA amendment act has actually helped to seek the

issues like price, quality of construction and delay.

It has actually helped to boost up the consumer confidence which has helped to drive the
growth in the real estate market
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Fixed Capital Investment

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Fixed Capital investment

Capital Investment It refers to the investments in a firm or enterprise to further its
business goals. This include only those investment which are not meant to be consumed
in the current period. The investment can be used to acquire fixed or capital assets such
as new manufacturing plant, new machinery etc.
Statistical measures fixed investment, such as from, Bureau of Economic Analysis,
Eurostat and other national and international statistical offices, considered by
economists around the world as an important indicator of long term economic growth
and productivity.

Fixed capital investment and economic growth

Economist all around the world has agreed to the proposition that fixed capital
investment is important for economic growth in long run.
Is growth can be accelerated or created by raising Fixed capital growth or there
are broader economic policies which accelerate growths and which in turn induce
high level of capital investment.
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Studies shows great economic growth had preceded the rise in capital formation (e.g.
Kuznets, 1973, p. 129).
Many research works which says the reverse, that, rate of capital formation
determines rete of countries economic growth (e.g. de Long and Summers, 1991 and
1992).
Researchers use cross-section data or pooled time series to study the impact of capital
investment on economic growth and vice-versa. This data show economic growth
precedes capital investment. Table (1)
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Short coming of this method is that cross sectional differences among countries
reflects permanent characteristics of the countries that encourage or discourages the
investment or economic growth like efficiency of government, violence in the
country, degree of corruption etc.
The above kinds of relationships can give wrong inferences that fixed capital
formation resulted in high growth and vice-versa.
To eliminate the above problem, each variable can be divided by the average of that
variable over the period in which it is used. This eliminates inter-country
differences, which in turn makes regression weaker, but result is persistent. Table (2)
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Gross Fixed Capital formation (% of

GDP) world

ross fixed Capital (%GDP)

S.No
Country year
1960 2016
1 India 14 27
2 Pakistan 11 14
3 Bhutan 50
4 Bangladesh 30
5 China 32
6 USA 22
7 Japan 30 (1960)
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LEADING INDICATORS IN THE CONTEXT

OF THE INDIAN ECONOMY

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Need for Economic Indicators in The Indian Economy:

Fourth Largest
Growing Economy in
terms of PPP (GDP:
3.36 trillion USD).
- These achievements
This revolution in the increased the
80s and 90s proved to significance of the
be immensely Indian economy in
beneficial to the the global scenario.
Second fastest
economy and helped
growing major - The need arose to
India achieve the Tenth Largest
economy with a forecast the
feats given alongside. Growing Economy
growth rate of performance of this
8.1% for the first in terms of
Exchange (GDP: growing economy
quarter of 2005- 691.87 billion USD).
06.

Liberalisation Process Achievements Consequences

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Ideal characteristics of a Leading Indicator for the Indian Economy

- Should cover a period of at least 50 years as India is a

developing country and hence comparison over the years and the
changing conditions is an absolute necessity.

- The cyclical revival centric month should be led by an

invariable interval of three (preferably six) months. SMOOTH TRANSITION INDICATORS

- Erraticism in movements should be absent. Smooth transition

from a cyclical crest to trough and vice versa is preferred so that
coming recession or inflation in the economy is heralded
beforehand. This is of immense important for a country like
India having limited resources.

- Relation to general economic activities is a must. This helps

build confidence that future movements of this indicator with
regard to economic cycles will be in sync with its past trends. INDICATORS SHOULD BE RELATED TO
GENERAL ECONOMICACTIVITIES
(Education, Agriculture, Poverty)
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Major leading indicators currently prevailing in the Indian Economic

Scenario
Leading Indicators in India
Leading Indicators in India
(contd.)
Gross Domestic Product (Contribution of Crude Oil Rates
Agriculture, Industry and Services)
Foreign Direct Investment Trends
Purchasing Power Parity Index

Fiscal Deficit Rain Fall Index

Trends in Inflation Rate Sensex

Interest Rates Exchange Rate

Credit Off-Take Savings/GDP Ratio

Balance of Payment
Human Development Index
Foreign Exchange Reserves
Electric Power Generation
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Leading indicators that affect the Indian Economy Majorly

1. GDP:
GDP as a leading economic indicator records the volume of goods and services produced in a given
economy. Its significance lies in the fact that along with recording the output level it also partly acts as
a benchmark for living standards.

Its major components are (the relation between them being additive in nature):

Criticism of GDP as a leading indicator in the Indian economy:

-GDP does not take the cash economy into account.

-It does not take human welfare aspects like education, employment, poverty, nourishment etc. into
account.
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Following is the graph that maps the GDP values for India over the last decade:
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2. Human Development Index:

- Deals with the dimension of the

economy, that GDP is not able to cover.

-Predictions by this indicator are generally

made in the following fields:
i. Poverty
GRAPH FOR EDUCATION LEVEL
GRAPH FOR LIFE EXPECTANCY ii. Employment
iii. Healthy (measured by birth rate and
death rate)
iv. Level of Education

-Need of the hour for the Indian economy.

- Adopted extensively by the Chinese

economy.
GRAPH FOR UNEMPLOMENT GRAPH FOR POPULATION
LEVEL BELOW POVERTY LEVEL
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India still lags behind as

far as implementation
and utilization of HDI as
an economic indicator is
concerned.
 POPULAR INDIAN
MANUFACTURING FIXEDCAPITAL SUMMARY AND
INTRODUCTION LEADING STOCK PRICES CONSUMERCREDIT ECONOMIC
& INVENTORY INVESTMENT CONCLUSION
INDICATORS SCENARIO

GRAPH SHOWING THE RELATION BETWEEN MONSOON

TRENDS AND AGRICULTURAL PRODUCTION ININDIA

Computation of Monsoon Index (Only four months, June through September are considered):
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