Leading Indicators for Business and Economic Forecasting
Author: Milagros O. de la Cruz and Teresita B. Deveza
This study deals with the identification of leading economic indicators and the development of a composite lead index of business cycles for the Philippines. A major aspect of investigation is to find out whether business cycles exist and are reflected in the actual performance of the Philippine economy. The time frame used for this study was the decade of the eighties. In the identification and testing of lead indicators, quarterly time series data were used. However, due to the difficulty in finding indicators with quarterly time series of at least ten years, only eleven indicators were tested, namely: real money supply, imports, inventory of consumer durable finished goods, number of new business incorporations, electric energy consumption, number of checks cleared, labor accession rate, inventory of consumer durable raw materials, stock price index, building permits, and loans granted by commercial banks. The Gross Domestic Product was considered to be the overall gauge of economic performance, hence, it was used as basis for the construction of the business cycle in the country. This paper tested the abovementioned indicators to identify the leading indicators of the economy’s business cycle. Derived from these indicators is the composite lead index Z that forecasts the direction of change of economic activity one quarter ahead.