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Economic Climate Tracer: Visualizing Cyclical Stance of Economy

The Economic Climate Tracer is a graphical tool used to visualize the cyclical stance of the economy using survey data. It plots levels against monthly changes, rotates through quadrants corresponding to business cycle phases, and provides a cross-section view across sectors. The tool enhances the understanding of the economic climate at a glance.

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Economic Climate Tracer: Visualizing Cyclical Stance of Economy

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  1. European Commission Directorate General for Economic and Financial Affairs Report: The Economic Climate Tracer – A tool to visualise the cyclical stance of the economy using survey data Christian Gayer (christian.gayer@ec.europa.eu) Joint EC/OECD Workshop on Business and Consumer Surveys 12-13 November 2007, Brussels European Commission 2007

  2. Motivation Conventional use of business and consumer survey results: time series plots Can information be assembled/presented in a different way, so as to • create added value for standard users • reach new audiences by attractive graphics • increase overall service? Example: Ifo’s "Konjunktur-Uhr“, similar tool was used in DG ECFIN (”Survey Watch”) European Commission 2007

  3. Economic Climate Tracer A new graphical tool used within DG ECFIN • Plotting levels against monthly changes • Rotation through quadrants of the graph • Corresponding to (growth) business cycle phases • Involves smoothing of input series • Main value added: Cross-section view provides cyclical stance across sectors at a glance European Commission 2007

  4. Outline • Critical review of an earlier tool: the “Survey Watch” • The Economic Climate Tracer • set-up • time-series view • cross-section view • Critical note: smoothness vs. absence of revisions • Conclusions European Commission 2007

  5. 1. Critical review of an earlier tool: the “Survey Watch” • Similar to Ifo Business Cycle Clock • Manufacturing industry • Current business perceptions vs. expectations (production, 3 months ahead) • Anticipation: rotation through the 4 quadrants as expectations should systematically lead assessments European Commission 2007

  6. France Survey Watch, 1990-2006 Euro area Spain European Commission 2007

  7. Drawbacks of the Survey Watch in practice • Short-term volatility dilutes systematic developments within & between quadrants • Too short lead of expectations no rotation, but movements along the main diagonal • Definition of quadrants not in line with conventional business cycle phases, determined by turning points European Commission 2007

  8. euro area Survey Watch, smoothed data France Spain European Commission 2007

  9. Drawbacks of the Survey Watch in practice • Short-term volatility dilutes systematic developments within & between quadrants • Too short lead of expectations no rotation, but movements along the main diagonal • Definition of quadrants not in line with conventional business cycle phases, determined by turning points European Commission 2007

  10. 2. The Economic Climate Tracer (1) • Inspired by Statistics Netherlands’ Business Cycle Tracer • Based on sectoral Climate Indicators, derived by PCA from BCS input series • Indicators are smoothed (low-pass HP) • Standardised level on y-axis plotted against m-o-m changes on x-axis European Commission 2007

  11. GRAPH 3: Diagram of the Economic Climate Tracer over time European Commission 2007

  12. 2. The Economic Climate Tracer (2) • Important visual attraction: automatic circular movement (counter-clockwise) • Smooth evolution due to filtering • Vertical dimension of the graph mirrors evolution of the raw series • Peaks in the upper centre of the graph, troughs in the lower centre • Quadrants correspond to growth cycle phases European Commission 2007

  13. Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (1) European Commission 2007

  14. Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (2) European Commission 2007

  15. Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (3) European Commission 2007

  16. Time-series view: summary • Similar picture across euro-area sectors • Peak in mid-2000 • Mini-cycles in 2002-2005 • Since 2006 in the boom quadrant • Move to downswing quadrant in early 2007 European Commission 2007

  17. Cross-section view • Displays several indicators in one graph • Focus on latest data point (smoothed) • Coincident indicator of overall cyclical stance • Comparative sector-wise analysis European Commission 2007

  18. Cross-section Economic Climate Tracer for the euro area in September 2007 European Commission 2007

  19. Cross-section view: euro area • Peak passed in all business sectors • Consumer climate marks peak, on the borderline to downswing • Building, retail trade and particularly industry climate still at high levels • Services and consumer climate at low levels, never fully recovered from low 2003-05 level European Commission 2007

  20. Cross-section Economic Climate Tracer for Germany and France, Sep 2007 European Commission 2007

  21. Cross-section view: Germany and France • Germany in early downswing phase, sustained by still relatively upbeat industry and consumer climate • France in late boom phase, exceptionally high level of retail climate. All indicators cluster at the border to downswing European Commission 2007

  22. 3. Critical note: smoothness vs. absence of revisions (1) • Crucial part of the Tracer: smoothing • Implies revisions as more observations become available, especially around TPs • Consequence: lag at turning points • Flip side of suppression of erratic turns • Timely and reliable TP-detection in noisy raw series is difficult, too  matter of choice! European Commission 2007

  23. 3. Critical note: smoothness vs. absence of revisions (2) • Focus on easy-to-use graphical tool • Risk of surprises mitigated by look at unsmoothed series and • Combined look across sectors (clusters?)  Still useful tool in monitoring turning points European Commission 2007

  24. 3. Critical note: smoothness vs. absence of revisions (3) Technically: • HP69 filter, i.e. excluding movements of less than 18 months duration • No de-trending of series • Comparison with other filters: HP works well, relatively fast in detecting TPs in real time European Commission 2007

  25. Conclusions • Attractive, useful and efficient tool for visualising and analysing the business cycle • Reliable picture of the current overall state of the economy • Disaggregate approach enables comparative sector-wise analysis (against historical average and against other sectors) • Helps to detect turning points • Main value added: Cross-section view provides cyclical stance across sectors at a glance European Commission 2007

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