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Development of Wisconsin's Leading Indicator Index: Insights and Challenges

This document outlines the creation and evolution of the Leading Indicator Index specific to Wisconsin's economy. It aims to establish an index based on reliable, monthly updated data to lead economic activity. Key components include employment statistics, consumer orders, and market indicators. Challenges include sourcing enough state-specific variables and ensuring data reliability. The work is inspired by existing national and state indicators, such as Iowa's index. The document also discusses revisions made to improve data accuracy and timeliness.

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Development of Wisconsin's Leading Indicator Index: Insights and Challenges

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  1. 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: http://www.iowa.gov/tax/taxlaw/ILIISept09.pdf

  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 IndicatorPrior 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 IndexUsing Three-Month Moving Averages

  27. 6-Month Annualized ChangeUsing Revised Index

  28. Diffusion IndexUsing Revised Index

  29. Questions/Comments • Visit us on the web: http://www.revenue.wi.gov/report/e.html#economy • My contact info: emily.camfield@revenue.wi.gov 608-261-5174

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