Revised leading economic indicator say Philippine economy to expand in first quarter of 2006

Is the economy heading for a first quarter slow down? Yes, said the National Statistical Coordination Board (NSCB) in February 1 through its report on the composite leading economic indicators. Last week, however, the NSCB has changed its mind saying the economy is rather heading for continued expansion in the first quarter this year as shown by revised composite LEI.

The LEI is an early warning system of sort designed by both NSCB and the National Economic and Development Authority to forecast the short-term trajectory of the Philippine economy.

According to the NSCB, the correction was prompted by an inquiry by the Department of Economic Statistics of the Bangko Sentral ng Pilipinas regarding the supposed errors on the contribution of “money supply” to the composite LEI. The corrections made on the entry, the NSCB said, led to the revision of the composite LEI.

“The composite leading economic indicator (LEI) sustains an upward trend in the first quarter of 2006,” said the NSCB in its revised report. “It continues to rise from 0.078 in the fourth quarter of 2005 to 0.155 in the first quarter of 2006. The composite LEI has been increasing since the third quarter of 2005 after suffering consecutive declines beginning with the third quarter of 2004.”

The NSCB uses eleven variables in the computation of the composite LEI, namely terms of trade index, electricity consumption, money supply, total imports, tourist arrivals, consumer price index, exchange rate, number of new business establishments, stock price index, hotel occupancy rate, and wholesale price index.

Under the revised composite LEI, seven indicators contributed positively stock price index, electric energy consumption, exchange rate, hotel occupancy, imports, terms of trade and money supply. The negative contributors were wholesale price index, consumer price index, tourist arrivals and new businesses.

The LEI does not determine the growth rate in the gross domestic product (GDP) of the economy. Rather it tends to determine whether or not economic activity is headed for a contraction or expansion.

“The system is based on an empirical observation that the cycles of many economic data series are related to the cycles of total business activity, i.e. they expand in general when business is growing and contract when business is shrinking. The LEIS was institutionalized to provide advance information on the direction of the country’s economic activity/performance in the short run,” said the NSCB.