Leading Indicators for Russia: Did They Actually Lead During the Crisis

of 2008-2009

French-Russian Academic and Research Conference ‘Economics, Politics, Society: New Challenges, New Opportunities’

Moscow, October 2010

State University – Higher School of Economics (Moscow, Russia)

“Development Center” Institute

Sergey Smirnov

Main Purpose & Limitations

Purpose Not to construct a new (‘really good’) leading

indicator But to test existing ones in their ability to predict

cyclical turning-points in ‘real-time’

Limitations Only last recession (2008-2010)

2

Three Consecutive Tasks To survey all available cyclical indicators for Russia To choose regularly (monthly) published between

them To check the last ones for their practical usefulness

in ‘real-time’

3

General Logic & MethodsMain question Was it actually possible to predict a turning point some months

before it occurred – relying on the dynamics of one or another leading indicator?

Some technical remarks All calculations are based on the concept of ‘growth rate cycles’

(not classic ‘business cycles’) Y-o-Y percent changes (‘a month to the same month of the previous

year’) are considered Official ‘basic branches of economy’ index is used as a proxy for

coincident cyclical index (CCI)

4

A Full Survey of Available Leading Indicators for Russia

Indicator Producer Fatal Shortcomings for Our Comparisons

Internationally Accepted Indexes for Russia

1 Purchasing Managers’ Index (PMI) Markit Economics No

2 Composite Leading Index (CLI) OECD No

Russian Indexes for Russia, Classic Type: Composite Leading Indexes

3 Composite Leading Index (CLI) Development Center (DC) No

4 Composite Leading Index (CLI) Institute of Economy (IE), Russian Academy of Science Figures never published

Russian Indexes for Russia, Classic Type: Indexes based on Business Tendency Surveys

5 Industrial Confidence Index (ICI) Higher School of Economics (HSE) No

6 Industrial Confidence Index (ICI) Rosstat Too short comparable time-series. Cyclical trajectory is quite similar to ICI’s by HSE

7 Industrial Optimism Index (IOI) The Institute for the Economy in Transition (IET) No

Russian Indexes for Russia: More Exotic

8 Leading GDP Indicator Renaissance Capital New Economic ‑School (RenCap-NES)

Short history. The indicators form rules out any ordinary comparisons with monthly indicators

9 Business Activity Index (BIF) ‘Finance.’ (one of Russian business journals)

Irregular news-releases. Too large of a publication lag (up to 3 months)

10 Business Activity Index (The Barometer)

‘Business Russia’ Association (‘Delovaya Rossiya’)

Too tangled of a methodology. Incomparability of neighboring observations. Short history.

11 Business Activity Index The Russian Managers Ass’n & Kommersant Newspaper

Too tangled of a methodology. Discontinued in April 2009

5

Five Indicators at Five Moments in the Past

5 moments in the past Oct. 2008 (shortly after the peak) Feb. 2009 (near the trough) July 2009 (shortly after the trough) April 2010 (before the peak) Oct. 2010 (just now)

5 regular & timely indicators PMI by Markit CLI by OECD CLI by DC ICI by HSE IOI by IET

6

-20

-15

-10

-5

0

5

10

15

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Per

cent

po

ints

Output of Basic Branches, Y-o-Y % change

May 2010

May 2009

Sept. 2008

5 regular & timely indicators

Indicator & Producer

Was it Useful to Forecast a Turning Point?

PMI by Markit Yes

CLI by OECD No

CLI by DC Yes

ICI by HSE No

IOI by IET Yes

Cyclical Dynamics as It Appeared in… October 2008 (shortly after the peak)

7

-5

0

5

10

15

20

25

Jan-

07F

eb-0

7M

ar-0

7A

pr-

07M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-

07D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Per

cent

po

ints

Output of Basic Branches PMI-MNF_Markit

CLI_OECD-September 2008 CLI_DC

ICI_HSE IOI_IET

Cyclical Dynamics as It Appeared in… February 2009 (near the trough)

5 regular & timely indicators

Indicator & Producer

Was it Useful to Forecast a Turning Point?

PMI by Markit May be

CLI by OECD No

CLI by DC Yes

ICI by HSE Yes

IOI by IET May be

8

-40

-30

-20

-10

0

10

20

Jan-

08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan-

09

Per

cent

po

ints

Output of Basic Branches PMI-MNF_Markit

CLI_OECD-January 2009 CLI_DC

ICI_HSE IOI_IET

Cyclical Dynamics as It Appeared in… July 2009 (shortly after the trough)

5 regular & timely indicators

Indicator & Producer

Was it Useful to Forecast a Turning Point?

PMI by Markit Yes

CLI by OECD No

CLI by DC Yes

ICI by HSE Yes

IOI by IET Yes

9

-40

-30

-20

-10

0

10

20

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun-

09

Per

cent

po

ints

Output of Basic Branches PMI-MNF_Markit

CLI_OECD-June 2009 CLI_DC

ICI_HSE IOI_IET

Cyclical Dynamics as It Appeared in…April 2010 (before the peak)

5 regular & timely indicators

Indicator & Producer

Was it Usefulto Forecast a Turning Point?

PMI by Markit No

CLI by OECD No

CLI by DC Yes

ICI by HSE No

IOI by IET No

10

-30

-20

-10

0

10

20

30

40

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

No

v-09

Dec

-09

Jan-

10

Feb

-10

Mar

-10

Per

cent

po

ints

Output of Basic Branches PMI-MNF_Markit

CLI_OECD-March 2010 CLI_DC

ICI_HSE IOI_IET

Cyclical Dynamics as It Appeared in… October 2010 (just now)

5 regular & timely indicators

Indicator & Producer

What is it saying to us about future growth rates?

PMI by Markit Slowdown

CLI by OECD Stability

CLI by DC A trough is near

ICI by HSE Stability

IOI by IET Acceleration

11

-30

-20

-10

0

10

20

30

40

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

No

v-09

Dec

-09

Jan-

10

Feb

-10

Mar

-10

Ap

r-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Per

cent

po

ints

Output of Basic Branches PMI-MNF_Markit

CLI_OECD-September 2010 CLI_DC

ICI_HSE IOI_IET

Was an Indicator Useful to Forecast Approaching Turning Point?

Indicator Oct. 2008 Febr. 2009 July 2009 June 2010

PMI by Markit Yes May be Yes No

CLI by OECD No No No No

CLI by DC Yes Yes Yes Yes

ICI by HSE No Yes Yes No

IOI by IET Yes May be Yes No

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Conclusions Between monthly indicators the CLI

by DC is the champion! Its trajectory during this crisis looks like as if it is taken from a textbook (see the chart on the left)

Unexpected: CLI by OECD is almost entirely useless in forecasting turning points (because of too large a lag and maybe some ‘oversmoothing’)

Other leading indicators for Russia are more or less useful but their track records are not very impressive

13

-40

-30

-20

-10

0

10

20

30

40

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

No

v-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

No

v-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Per

cen

po

ints

Cyclical Indicators by DC

Leading Coincident Lagging

Possible Extensions Construction of weekly leading indicators for Russia Similar audit of leading indicators for other countries

(US, Germany, etc.)

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