Glossary for OECD Composite Leading Indicators

  A  B  C D E F  G H I J K L  M  N  O  P Q R  S  T U V  W X Y  Z  

A :   AMPLITUDE ADJUSTMENT
B :   BUSINESS CYCLE
C :   CLI
       COMPONENT SERIES
       CYCLE
G :   GROWTH CYCLE
M :   MCD
N :   NORMALISATION
O :   ONE-MONTH PERCENT CHANGE
P :   PHASE
R :   RATIO TO TREND
       REFERENCE SERIES
S :   SIX-MONTH RATE OF CHANGE
       SMOOTHING
T :   TREND-RESTORED
       TREND
       TURNING POINT
       TWELVE-MONTH RATE OF CHANGE AT ANNUAL RATE SMOOTHED
W :  WEIGHTING
Z :   ZONE
 

AMPLITUDE ADJUSTMENT
The CLI is adjusted to ensure that its cyclical amplitude on average agrees with that of detrended reference series.

BUSINESS CYCLE
Business cycles are recurrent sequences of alternating phases of expansion and contraction in the level of a time series

CLI
CLI is an aggregate time series displaying a reasonably consistent leading relationship with the reference series for the macroeconomic cycle in a country. CLI is constructed by aggregating together component series selected according to the criteria specified in component series. However, It is important to emphasize that component series are not selected according to a strict quantitative criteria based on the cross-correlation with the reference series. Thus, CLI can be used to give an early indication of turning points in the reference series but not for quantitative forecasts.

COMPONENT SERIES
Component series are economic time series which exhibit leading relationship with a reference series at the turning points. Their seasonally adjusted or raw form are combined into a CLI. The component series are selected from a wide range of economic sectors. The number of series used for the compilation of the OECD CLIs varies for each Member country, i.e. between five and eleven series. Selection of the appropriate series for each country are made according to the following criteria: Economic significance: there has to be an a priori economic reason for a leading relationship with the reference series; Cyclical behaviour: cycles should lead those of the reference series, with no missing or extra cycles. At the same time, the lead at turning points should be homogeneous over the whole period; Data quality: statistical coverage of the series should be broad; series should be compiled on a monthly rather than on a quarterly basis; series should be timely and easily available; there should be no break in time series; series should not be revised frequently.

CYCLE
the time span separating two turning points of the same nature (two peaks or two troughs).

GROWTH CYCLE
Growth cycles are recurrent fluctuations in the series of deviations from trend. Thus, growth cycle contractions include slowdowns as well as absolute declines in activity, whereas business cycles contractions includes only absolute declines (recessions). The OECD cyclical indicator system uses the "growth cycle" approach.

MCD
MCD (Months for Cyclical Dominance) is defined as the shortest span of months for which the I/C ratio is less than unity. I and C are the average month-to-month changes without regard to sign of the irregular and trend-cycle component of the series, respectively. There is a convention that the maximum value of MCD should be 6. For quarterly series, there is an analogous measure, quarters for Cyclical Dominance (QCD), which has a maximum value conventionally defined as 2.

NORMALISATION
This transformation of the detrended component series is required prior to aggregation into CLI in order to express the cyclical movements in a comparable form (i.e. for either a multiplicative or an additive model when estimating the trend); the cyclical amplitude is homogenised. The method used to calculate normalised indices is to subtract the mean from the observed value and then to divide the resulting difference by the mean of the absolute values of the difference from the mean.

ONE-MONTH PERCENT CHANGE
The 1-month percent change is defined as the month-to-month change in the trend restored CLI. This gives an indication of the most recent changes in the indicator. A change in the direction of the indicator, or a continued inflection in the rate indicates a turning point. In practice, a 3-month rule can be applied for the identification of a turning point. That is, three consecutive months of negative/positive change will give a signal for a peak/trough.

PHASE
time span between a peak and a trough.

RATIO TO TREND
The trend is eliminated from the series by dividing the original series by the trend to give a ratio-to-trend since the underlying structure of most series used is multiplicative. For series whose underlying structure is additive, a difference-from-trend series is calculated.

REFERENCE SERIES
Cyclical indicator systems are constructed around a "reference chronology". The reference series is the economic variable whose cyclical movements it is intended to predict. In the OECD system, the index of total industrial production is used as the reference series. Ideally, Gross Domestic Product (GDP) would be used as the reference series, but for many countries, there is often a substantial time lag in the publication of GDP estimates and they are usually available only on an annual or quarterly basis. Industrial production constitutes the more cyclical part of the aggregate economy and the cyclical profiles of industrial production and GDP have been found to be closely related, so that cyclical indicators identified against industrial production serve well as indicators for the GDP cycles.

SIX MONTH RATE OF CHANGE
The annualised 6-month rate of change of CLIs is calculated by dividing the figure for a given month m by the 12-month moving average centred on m-6.5. It is easier for users to interpret the annualised 6-month rate of change since the volatility in the CLI has been smoothed out. At the same time, the annualised 6-month rate of change provides earlier signals for the turning points. Let R(t) and C(t) be respectively the 6-month rate of change and the CLI at t,

SMOOTHING
component series are smoothed according to their MCD (months for cyclical dominance) values to reduce irregularity.

TREND-RESTORED
This form of the CLI is calculated by multiplying the amplitude-adjusted and ratio-to-trend CLI by the trend of the reference series to obtain the trend restored CLI. This trend-restoration enables direct comparison with the reference series.

TREND
In time series analysis, a given time series can be decomposed into: - A cyclical component, - A trend component, - A seasonal component, - An irregular component, The method of trend estimation adopted by the OECD is a modified version of the phase-average trend (PAT) method developed by the United States NBER.

TURNING POINT
In the growth cycles analysis, a turning point occur in a series when the deviation-from-trend series reached a local maximum (Peak) or a local minimum (Trough). Growth cycle peaks (end of expansion) occur when activity is furthest above its trend level. Growth cycle troughs (end of contraction/recession) occur when activity is furthest below its trend level.

TWELVE-MONTH RATE OF CHANGE AT ANNUAL RATE SMOOTHED
this rate is calculated by dividing the figure for a given month m by the 12-month moving average centred on m-12. Let R(t) and C(t) be respectively the 12-month rate of change and the CLI at t is

WEIGHTING
Component series are equally weighted in the aggregation process into a country CLI. On the other hand, GDP-PPP weights are used to estimate the CLIs for groups of countries, i.e. zone.

ZONE
In addition to the individual country series OECD calculates zone aggregates for CLIs and reference series included in the OECD CLI framework. Four indicators (the amplitude adjusted CLI, the original reference series, the smoothed reference series and the trend of the reference series) are calculated using a chain linking formula, with country components weighted according to their GDP share (on a Purchasing Power Parity basis). Weights are changed every five years. Iceland is excluded from zone calculations since no CLI is published for this country. Four other indicators are calculated or derived from the four indicators above. This is done to preserve the relationship between the different indicator types. The derived indicators are: the trend restored CLI and its 6month rate of change, the ratio to trend of the original reference series and of the smoothed reference series.

More detailed information is available in the CLI zone aggregation methodology document. The list of zones and their country composition is available on the OECD website.