Improved Leading Indicator for Economic Activity in Israel Using the OECD Method (iOECD)
This study presents a leading indicator of economic activity in Israel using the CACIS (Cyclical Analysis and Composite Indicator System) employed by the OECD for the development and ongoing calculation of a composite leading indicator (CLI) for business cycles. The indicator, iOECD, is designed to provide early signals of turning points (expansion/slowdown) in economic activity in Israel relative to the long-term trend. The approach on which the indicator is based is a growth cycle that measures deviation from the long-term trend. The business cycle is represented by the industrial production index, the assumption being that the cyclical behavior of this index matches that of GDP. The leading indicator has been calculated since 1997, a period of price stability in the economy. The leading indicator comprises ten economic series, and its performance seems better than the performance of the leading indicator that the OECD constructed for Israel. The comparative advantage of the index is reflected by a longer lead time with a smaller standard deviation and a higher (lagged) cross-correlation at peak with the target variable. In addition, the series of the indicator cover a greater share of economic activity. Similar to the OECD indicator, the best alternative includes indices connected to the openness of the economy, to wholesale and retail trade and to the stock market; at the same time it was found that including variables that represent development of raw-materials inventory improves the performance of the index. Interestingly, as opposed to the OECD indicator, the leading indicator does not include variables that inquire directly about the expected future situation. Nevertheless, similar to previous research findings, it was found that responses about one's expected personal situation in the future reasonably precede the turning points in economic activity. A sensitivity analysis of the performance of the indicator to real-time data indicates a rather limited impact on the results.