10 years experience in forecasting turning points Jacques Anas Director, Economic Indicators and Statistical Models [email protected]INTERNATIONAL SEMINAR ON EARLY WARNING AND BUSINESS CYCLE INDICATORS 14-16 December 2009, Scheveningen, The Netherlands
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10 years experience in forecasting turning points
Jacques AnasDirector, Economic Indicators and Statistical [email protected]
INTERNATIONAL SEMINAR ON EARLY WARNING AND BUSINESS CYCLE INDICATORS14-16 December 2009, Scheveningen, The Netherlands
10 years experience in forecasting turning points December 14, 2009
IntroductionIntroduction
In 1996, The Chamber of Commerce of Paris decided to investigate the development of a leading indicator for the French economy. This has been the starting point of this detecting system I will present : methodology and real time results.
The concept of turning point must be clearly defined : A hidden event (local extrema, change of regime), quite difficult to predict.
Expectations of users (Government, Central Banks, corporate sector, economists for their prediction) are not identical. If the goal is clear (anticipate an economic upturn or downturn), the communication is an issue (probability, threshold and signal, risk, quantitative implication). There is a need to simplify the messages and to link the signal to an economic analysis.
A tool to be used in complement of other tools (modelisation, short-term analysis by economists). It must be considered as a safety net.
Validation is an issue (ex-post dating to have a reference chronology)
10 years experience in forecasting turning points December 14, 2009
The concept of detectionThe concept of detection
1. We consider here the follow-up of cyclical movements through cyclical indicators with the purpose to be timely or even leading the movements;
2. It is different than using warning indicators, more structural (imbalances for ex) and potentially leading to crises.
Past TP’s Dating (chronology)
Present TP’s Real time detection (implicitly predicting the future also!)
Future TP’s Predicting turning points (there is an interesting topic: what is a false alarm? It may happen that the signal is invalidated by an external shock or by a quick policy-mix answer.
www.coe.ccip.fr
10 years experience in forecasting turning points December 14, 2009
Turning point detection systemTurning point detection system
A conceptual framework: the ABCD approach
3 indicators:
• IARC: Indicateur avancé de retournement conjoncturel (to predict A and D)
• IESR: Indicateur d’entrée-sortie de récession (to detect B and C)
• IRC: Indicateur de croissance sous-jacenteTo validate the signals of the IARC and IESR indicators
10 years experience in forecasting turning points December 14, 2009
The framework: the ABCD The framework: the ABCD approachapproach
What kind of a cycle?
• Classical business cycle Level
• Growth cycle Deviation to trend
• Growth rate cycle Variation
Vocabulary issue:
phases of BC : recession and upturnphases of GC: slowdown and rebound phases of AC : deceleration and re-acceleration
www.coe.ccip.fr
10 years experience in forecasting turning points December 14, 2009
Three possible representations
• Classical cycle (in level)• Growth cycle (deviation from trend) • Growth rate cycle
ABCD approach
10 years experience in forecasting turning points December 14, 2009
10 years experience in forecasting turning points December 14, 2009
Three possible sequences of Three possible sequences of downturn movementsdownturn movements
Pure acceleration cycle (« trou d’air »)
• αβ
Growth cycle:
• αA(β)D• αA(βαβ)D with an acceleration cycle during the slowdown
Business cycle: (β is the first optimistic signal)
• αAB(β)CD• αAB(βαβ)CD with an acceleration cycle during the recession
• αAB(βCαBβ)CD case of a double-dip recession
10 years experience in forecasting turning points December 14, 2009
United States
C ycle d u tauxd e cro issanceo u cycled 'accé lératio n(acce latio ncycle ),rep résenté p arle taux d ecro issanceinstantané d e lap ro d uctio n.
C ycle d esaff aires o u cycleclassiq ue(b usiness cycle ),rep résenté p arle n iveau d e lap ro d uctio n.
C ycle d ecro issance(g ro w th cycleo u d eviatio ncycle ),rep résenté p arl'écart d univeau d e lap ro d uctio n à satend ance .
10 years experience in forecasting turning points December 14, 2009
A couple of probabilistic A couple of probabilistic indicators applied to France, indicators applied to France, the euro area and United the euro area and United StatesStatesImportance of non linear processes in business cycle analysis
A leading indicator of the growth cycle (IARC)• Based on Neftçi’s a posteriori probability method
applied to leading series (Neftçi, 1982, 1984).
A coincident indicator of the business cycle (IESR)• Based on the univariate Markov switching model
applied to coincident series (Hamilton, 1989, 1990).An important step is the selection of indicators on which
the model is applied. An aggregation method has been developed to combine the probabilities
10 years experience in forecasting turning points December 14, 2009
1. IARC indicator predicting A and 1. IARC indicator predicting A and DD
)()1)(1()()1(
)()1(1
10
11
011
ttttttt
ttttt xfTPxfTPP
xfTPPP
Recursive bayesian algorythm of Neftçi (1982)
Computed since 1997
Need of a preliminary dating of the growth cycle turning points to select the candidate leading indicators
Multiple criteria (statistical, practical and economic) to select the leading indicators (real, financial and surveys)
10 years experience in forecasting turning points December 14, 2009
Each « k » component allows for the computation of the probability of a coming economic turning point (Rt=1)
)0()01()1()11()1( kt
ktt
kt
kttt
k SPSRPSPSRPRP
)10( ktt
kt SRP
)01( ktt
kt SRP
Prediction of a global turning Prediction of a global turning point based on one component point based on one component
kt
kkkt
k PRP )1()1(
10 years experience in forecasting turning points December 14, 2009
Components of US IARCComponents of US IARC
Consumers anticipations
Manufacturing Inventories (inverse)
New Construction Permits
Stock Market Index (MA3)
Interest Rate Differential (MA3)
Chief Executives Polls
10 years experience in forecasting turning points December 14, 2009
kt
kkN
k
N
k
ktk P
NRP
N)1(
1)1(
1
1 1
kt
N
k
kk
PN
1
1
Weighted aggregation of the «a Weighted aggregation of the «a posteriori probabilities» (a posteriori probabilities» (a prioripriori weights)weights)
10 years experience in forecasting turning points December 14, 2009
2. IESR indicator (coincident for B 2. IESR indicator (coincident for B and C)and C)
Modelling coincident variables by Markov Switching models
(St)t K-state first order Markov chain with transition probabilities pij
where p11+ p12+ …+ p1K =1
Parameters estimation: maximum likelihood in conjunction with Expectation-Maximization
Choice of K: comparison of 2 and 3 regimes in terms of cycle replication measured by:
T
ttt PR
TQPS
1
2)(1
1
( ) ( )p
t t j t t j tj
Y S S Y
10 years experience in forecasting turning points December 14, 2009
Decision rules for Decision rules for communicationcommunication
Empirical thresholds for aggregate probabilities
• IARC• 60% and 80% for the aggregate IARC
• SERI• 50% for filtered probabilities and the aggregate probability
www.coe.ccip.fr
10 years experience in forecasting turning points December 14, 2009
Goal : we need to validate quicly a signalAnswer: by estimating a monthly GDP underlying growth rate ( few revisions, increased timeliness, reduced volatility)
General form of ADL models (Autoregressive Distributive Lag)-
1 0 1 1
2
2,...,
(0, )
t t t t t
t
y y m gt x x
t n
NID
1
tx is the matrix of k endogenous series of size (n x k)
0 1 are vectors of size (n x 1)
and are constantm g
10 years experience in forecasting turning points December 14, 2009
Selection process of the best Selection process of the best modelmodel
• Univariate selection of the best series for estimating the last three years period of definitive GDP (2004-2006)
• Selection of the best three series (in level or in difference)
The choiceThe choice :
- Estimate and extrapolate the model using all past quarterly GDP available at the cost of revising the estimate
or - Estimate and extrapolate using only »final» data at the cost of
missing strong movements which can’t be captured with surveys (present case)
10 years experience in forecasting turning points December 14, 2009
The selected modelThe selected model for the for the United StatesUnited States
- Housing Index
- manufacturing ISM- Household confidence index (Conference Board)
(1,70) ( 1,22)
1 (67) (2,30) 1 ( 1,60)
0,30) (0,42)
0,98 0,74
0,82 2285 2,12 1,39
0,09 0,13t t t t tY Y X X
1 2 3( , , )t tX V V V
tY : monthly variation of GDP
10 years experience in forecasting turning points December 14, 2009
Performance analysis Performance analysis IARC of France (1997-2006)IARC of France (1997-2006)
10 years experience in forecasting turning points December 14, 2009
4 recessions in France since 19704 recessions in France since 1970
Milliards d'euros aux prix de l'année précédente chainés (taux annuel)
1970 1975 1980 1985 1990 1995 2000 2005 2010500
700
900
1100
1300
1500
1700
1900
10 years experience in forecasting turning points December 14, 2009
9 slowdowns (4 are related to a 9 slowdowns (4 are related to a recession)recession)
Ecart à la tendance
1970 1975 1980 1985 1990 1995 2000 2005 2010
0
-3
-2
-1
0
1
2
3
10 years experience in forecasting turning points December 14, 2009
Slowdowns happen when growth is Slowdowns happen when growth is below trend growth ratebelow trend growth rate
Croissance du PIB et de la tendance(variation sur un trimestre en %)
1970 1975 1980 1985 1990 1995 2000 2005 2010
0
-4
-2
0
2
4
6
8
TendancePIB (mm3)
1
2
3
10 years experience in forecasting turning points December 14, 2009
Asian CrisisAsian Crisis
Signal for the related slowdownSignal for the related slowdown At the end of May we could say : “the economic slowdown may have been of short
duration, probably three quarters, and also of low amplitude
100
80
60
40
20
Recherche du prochain pic
0
possibilité deretournement
forte probabilité
de retournement
J FMA MJ J A S ON D J F MA MJ J A SON D
1997 1998
88.2oct.98
10 years experience in forecasting turning points December 14, 2009
Slowdown of 2001Slowdown of 2001
As early as September 2000, the 80 threshold was As early as September 2000, the 80 threshold was reached in the euro areareached in the euro area October 2000 IARC indicator for the euro area published on
November 23, 2000
10 years experience in forecasting turning points December 14, 2009
Signal of slowdown exit in July-August Signal of slowdown exit in July-August 20032003
A signal was given however in February 2002 but in October 2002, we could say that the rebound was aborting
August 2003 IARC indicator for France published on October 3, 2003
10 years experience in forecasting turning points December 14, 2009
Acceleration cycle in 2005Acceleration cycle in 2005
A slowdown was anticpated in June but the signal was A slowdown was anticpated in June but the signal was weak and cacelled out as soon as September 2005”weak and cacelled out as soon as September 2005”
10 years experience in forecasting turning points December 14, 2009
Performance of the indicators Performance of the indicators IARC, IESR and IRC during the IARC, IESR and IRC during the
current cycle current cycle ““How they work together”How they work together”
10 years experience in forecasting turning points December 14, 2009
EURO areaEURO area
-Signal of slowdown with June 2007 IARC-Signal of recession with August 2008 IESR (published 14th of October)-Signal of exit of slowdown with May 2009 IARC-Signal of exit of recession with September 2009 IESR
Zone euroIndicateur d’entrée et sortie de récession (IESR)
IARC of August 2007 >80 Peak of the growth cycle in the coming 3 months
September 18,2007 signal !
Start of the recession according to IRC!
10 years experience in forecasting turning points December 14, 2009
IARC, IRC and GDP for FranceIARC, IRC and GDP for France(real time analysis , even for GDP)(real time analysis , even for GDP)
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24-juil.-09
25-sept-09
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
07-mars-08
07-avr-08
07-mai-08
09-juin-08
08-juil-08
03-sept-08
25-sept-08
29-oct-08
25-nov-08
23-déc-08
28-janv-09
25-févr-09
25-mars-09
27-avr-09
27-mai-09
23-juin-09
24-juil.-09
25-sept-09
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
07-mars-08
07-avr-08
07-mai-08
09-juin-08
08-juil-08
03-sept-08
25-sept-08
29-oct-08
25-nov-08
23-déc-08
28-janv-09
25-févr-09
25-mars-09
27-avr-09
27-mai-09
23-juin-09
24-juil.-09
25-sept-09
25-oct.-09
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
07-mars-08
07-avr-08
07-mai-08
09-juin-08
08-juil-08
03-sept-08
25-sept-08
29-oct-08
25-nov-08
23-déc-08
28-janv-09
25-févr-09
25-mars-09
27-avr-09
27-mai-09
23-juin-09
24-juil.-09
25-sept-09
25-oct.-09
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
07-mars-08
07-avr-08
07-mai-08
09-juin-08
08-juil-08
03-sept-08
25-sept-08
29-oct-08
25-nov-08
23-déc-08
28-janv-09
25-févr-09
25-mars-09
27-avr-09
27-mai-09
23-juin-09
24-juil.-09
25-sept-09
25-oct.-09
24-nov.-09
IARC of May 2009 <-80 Trough of the growth cycle in the coming 3 months
June 5, 2009 signal !
End of recession according to IRC
10 years experience in forecasting turning points December 14, 2009
IARC, IRC, IESR and GDP in the United IARC, IRC, IESR and GDP in the United StatesStates (real time analysis , except for GDP)(real time analysis , except for GDP)
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
août-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
août-09
sept-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
août-09
sept-09
-8
-6
-4
-2
0
2
4
j f m a m j j a s o n d j f ma m j j a s o n d j f m a m j j a s o n d
2008 2009 2010
déc-08
janv-09
févr-09
mars-09
avr-09
mai-09
juin-09
juil-09
août-09
sept-09
nov-09
IARC of May 2009 <-80 Trough of the growth cycle in the coming 3 months
June 3, 2009 signal !
August 28, 2009 statement :
End of recession according to a markovian model based on initial claims for unemployment (date : June)
End of recession according to IRC
IESR = 0.65 in October still no sign of exit of the recession
10 years experience in forecasting turning points December 14, 2009
Improvements for the futureImprovements for the future
The results of the indicators were quite useful to complement the short-term economic analysis. When the indicator is not going in the same direction of an analysis, it stimulates the discussion and imposes some cautiousness in assertions. At times, it may correct the prediction. But there is a real difficulty to communicate.
The communication with the sequential Netçi’s approach is not easy because it is a recursive process with a discontinuity (semi-parametric approach). A times series approach would be preferable. We may also consider a multivariate approach. Models with more than two regimes may help to consider anticipating A,B, C and D at the same time.
It is rather difficult to make a difference between anticipating a deceleration and anticipating a slowdown. We have not been successful in making this difference but at least we could quickly detect the re-acceleration (which may be an abortion of a rebound for exemple). A particular example is the signal of economic upturn in United States given during the summer 2001 but which was invalidated by September 11.
A route to improve the pertinence of the signal is to increase the threshold from 80 to 90 for example, but we may lose on lead. There is a trade-off between timeliness and minimizing first-type errors.