PHILIPPINE LEADING INDICATORS: A NEW TOOL FOR KEEPING TABS ON THE ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00447R000302200001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2010
• Sequence Number: 1
• Publication Date: October 25, 1985
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
25 October 1985
Philippine Leading Indicators: A New Tool
For Keeping Tabs on the Economy
Summary
Current analysis of the Philippine economy has been
handicapped because data on economic activity typically
are reported with a three- to six-month lag and are
subject to considerable later revision. To circumvent
this problem, we have developed a CIA index of economic
indicators--which follow money, prices, trade, profit
expectations, government revenues, and manufacturing
employment and production costs. We judge these will give
advance warning of a turn in the economy, providing a
systematic and continuous means for tracking the pulse of
activity months before national output statistics are
Our most recent analysis of the indicators suggest
the two-year economic decline has levelled off. In the
months ahead, we believe continued growth in exports,
stock prices, and reserve money would indicate the economy
has turned a corner and may be poised for recovery.
Alternatively, lack of growth in these indicators during
the next few months would foreshadow continued economic
This t escri t memorandum was prepared byl land
1: Islands Branch, Southeast Asia Division, and 25X1
Systems Development Staff, Office of East Asian
Analysis of the Directorate of Intelligence. It was coordinated
with the National Intelligence Council. Information available as 25X1
of 19 October was used in its preparation. Comments are welcome
EA M-85-10189
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Tracking a Moving Target
Tracking the Philippine economy is particularly important
as local and presidential elections approach in mid-1986 and
1987 and as Manila struggles to contain the rapidly growing
Communist insurgency. A "real-time" assessment of the twists
and turns in the economy, however, is handicapped by lags in
Philippine Government data; GNP statistics typically are
released three to six months after the reporting period ends--
and have been subject to considerable later revisions. For
example, although national output declined by 5.3 percent last
year and by 3.5 percent in the first half of this year,
economists differ over whether aggregate economic activity in
the Philippines conti-n~les to decline, has bottomed out, or is
inninn to in
a
be
cre
se
g
To help resolve this dilemma and improve our current
analysis of the economy, we have constructed an index of leading
economic indicators (see Table 1). The CIA index is a composite
of eight financial and economic variables that allows us to
Philippine Economic Indicators: Components of the Index
Timing Relative
Indicator to the Economy Relation to National Output
Stock Prices Leading Incorporates expectations of profits and
investor views of the economy's future.
Consumer Price Concurrent Price changes track the balance between
Inflation spending and production. As economic
activity increases, prices of goods,
services, and wages are bid upwards.
Reserve Money Leading Determines funds available to banks for
lending and influences total spending.
Government Revenue Concurrent Reflects domestic sales and imports--which
account for over 65 percent of government revenues--
as well as personal and corporate income,
which together provide another 20 percent of revenues.
Exports Leadinq Directly and indirectly accounts for nearly
40 percent of national output.
Imports Concurrent Reflects demand for productive inputs and
consumption goods.
Value of Leading Tracks the total cost incurred in manufacturing
Manufacturing Output goods, reflecting anticipated demand and
Manufacturing
Employment
order backlogs.
Indicates employment in 15 sectors, tracking the
actual or anticipated demand for goods.
1We believe that a growth rate of minus 3.5 percent for the
first six months of this year--calculated by seasonally adjusting
GNP data--is a more accurate measure of changes in GNP than the 25X1
4.6 percent decline reported by Manila.
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anticipate when an economic turning point is imminent. (See
appendix for a detailed discussion of the methodology).
the agriculture or service sectors, we believe on the basis of 25X1
the index's performance when run against data available over
the past 12 years, that it is sufficiently broad to anticipate
major turns in the economy. Our analysis of the index suggests
that it leads turns in the economy by three to four months--
well before quarterly GNP data are available. When the index
turns upward, for example, an upswing in the economy may be in
the offing. A one-month change in the index, however, is not
sufficient to signal a turning point in the business cycle; a
sustained change of direction of up to six months is
What Do the Indicators Currently Tell Us?
Using data available through July of this year, combined
with the knowledge that the index leads changes in the economy,
we believe that the two-year slide of the Philippine economy
has ended. The relative stability of the index in recent
months suggests that the economy stopped its decline in August
or September and that its flat performance continues into
October. Six of the index's eight components have stopped
falling. Indeed, export volume has improved markedly since
earlier this year, although still below its 1984 levels.
Nevertheless, the signals being sent by the indicators are
not without ambiguity. Declining inflation and government
revenues, for example, suggest a continuation in the economy's
deterioration. Falling inflation rates often reflect weak
demand for domestic goods, while declining government revenue
suggests that sales, trade, and incomes are depressed. The
continued downturn in these two indicators is less troubling
than it seems, however, because they usually reflect the
current state of the economy, rather than future changes (see
Figure 1).
If the index of indicators remains relatively flat for the
next few months--and preliminary data for August indicates that
it is--economic growth in the second half of this year will
probably be close to zero. However anemic this appears, it
would be the best economic performance for the Philippines
Even though data limitations make it difficult to track
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Figure 1
THE PHIUPPINES: ECONOMIC INDICATORS
MONTHLY INDEX FOR 1984-85*
91
"0 1~
Mrs*-month moving average, April 1984 = 100.
since the first half of 1983.2 Two of the four indicators
available for August are up. The Manila stock market showed a
sharp gain in August--a trend which continued throughout
September--an n-adjusted money supply continues to
trend upward.
What to Watch in the Coming Months
During the next three to four months, we believe that a
sharp improvement in the month-to-month performance of export
volume, stock prices, and inflation-adjusted money supply would
indicate that the economy has turned the corner and may be
2Even if the economy does not contract further or even grows
a little, it is probable that the growth rate Manila reports for
the second half of 1985 will still be negative. This is a result
of the statistical method Manila uses to calculate economic 25X1
growth. The Philippine Government reports GNP growth rates on a
year-over-year basis rather than a seasonally adjusted quarter-
to-quarter basis--as is the case in the United States.
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poised for recovery. For example, our analysis indicates that
the economy is particularly senstitive to the performance of
exports--a 10-percent increase in3export earnings raises GNP
growth by four percentage points. In addition a sustained
improvement in the stock prices of the largest Philippine
corporations--in decline since early 1979--would indicate that
investors expect profits to improve and that they are more
hopeful about the economy. Moreover, an improvement in
inflation-adjusted money balances--one intended outcome of the
IMF's recent move to raise Manila's ceiling on reserve money--
would reflect an increase in loanable funds at commercial banks 25X1
available to finance consumer and business spending.
An upturn in the economy would be further confirmed if the
index of manufacturing output and employment showed month-to-
month improvements--reversing its 35-percent decline since
1981. Because the manufacturing sector is concentrated in
Manila, its expansion would help to reverse the city's 28
percent unemplo m t to and to stem growing labor unrest, in
our judgment. 25X1
Alternatively, a further contraction of the economy would
be indicated by a decline in the real value of exports.
Continued poor export performance is possible if the turnaround
in the world market for electronics--expected by many industry
analysts for early next year--fails to materialize or
Philippine commodity exports slump because of weak world
markets. A resumption of the "bear" market in Philippine
stocks, moreover, would suggest that forecasts of improving
profits have been revised downward and that investors are
increasingly concerned about the country's political future.
3This analysis is based on the CIA econometric model of the
Philippine econom .
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Appendix
Economic Indicators: Methodology
An index of indicators monitors the timing of business
fluctuations, determining when the balance of the individual
indicators signals a turn from overall economic contraction to
expansion. An index of leading indicators, for example, can call
a turn in the business cycle well in advance of the event--a 10-
month lead time is average for the US leading indicators compiled
by the Department of Commerce. Coincident indicators, on the
other hand, call a turn within a few months of the event.
Variables used in an index typically cover different aspects of
the economy, including output and employment, investment and
savings, money, credit and interest rates, price-cort
relationships, profits, and business expectations.
Developing Indicators for the Philippine Economy
Steps taken to develop an index of leading indicators for
the Philippine economy include:
--Identifying candidate data series. A candidate data series
must reflect aggregate economic activity such as
manufacturing output. Therefore such narrow series as gold
production are omitted. Furthermore, data must be available
on a timely basis.
--Selecting the data series. Variables are included in the
index by scoring high on a ranking which covers their
consistency since 1973 against movements in GNP, the
smoothness and statistical adequacy of data, the current
availability of data, and the variable's economic
significance. On this basis, we selected eight variables,
including stock prices, consumer prices, inflation,
employment in manufacturing, value of manufacturing output,
exports and imports, government revenue, and reserve money.
--Building the Index. The selected variables are combined
into one index by assigning weights for their relative
importance based on the average percentage change in each
variable--a process which compensates, for example, for large
percentage changes in inflation compared with small
percentage changes in exports. To eliminate biases
introduced by inflation and regular seasonal fluctuations,
each variable has been seasonally adjusted and deflated. In
addition, the index is converted into a three-month moving
average to smooth out random fluctuations.
-6- 25X1
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Caveats
The index of leading indicators for the Philippines contains
several shortcomings. For one thing, accurate and timely data
covering national employment and compensation are not
available. Furthermore, only a relatively small number of
economic variables are available on a timely basis, and two large
sectors of the economy--agriculture and services--are not well
tracked by any of the variables. This problem is less serious
than it might appear because agricultural output varies little in
the short-run compared with manufacturing output and, as a
result, agriculture is generally not responsible for triggering a
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 T14;7 PNn lppimm? r c_nlnkAir - iNnir,ATnPR* ANn
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KJY 1VIN I S
-A,c N40 'CIP",
+QUARTERLY AVERAGE OF SEASONALLY ADJUSTED MONTHLY DATA.
SHADED AREAS INDICATE RECESSIONS.
RECESSIONARY PERIODS WERE CALCULATED USING A MODIFIED US
NATIONAL BUREAU OF ECONOMIC RESEARCH METHOD. RECESSIONS INCLUDE
BOTH DECLINES IN GROSS NATIONAL PRODUCT AND SLOWDOWNS
IN GROWTH--"GROWTH RECESSIONS"
THE INDEXES SHARP INCREASE IN LATE 1153 IS
CAUSED BY RAMPANT INFLATION AND THE CONTINUED PESO DEVALUATION.
UNDER THESE EXTREME CIRCUMSTANCES. OUR DEFLATORS DO NOT MAKE
AN ADEQUATE ADJUSTMENT FROM NOMINAL TO REAL VALUES.
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Typescript: Philippine Leading Indicators: A New Tool for
Keeping Tabs on the Economy
EA M-85-10189
Original--OEA/SEA/IB
1--OEA/SEA/ITM
1--D/OEA (4F18)
1--DC/OEA/SEAD
1--PDB Staff (7G15)
1--NIC/Analytical Group (7E62)
1--NIO/EA (7E47)
5--CPAS/IMC/CB (7G07)
1--C/PES/DDI (7F24)
1--DDI (7E47)
1--DCI (7D60)
1--DDCI (7D6011)
1--C/DO/IAD (3D00)
1--C/DO/EA (5D00)
1--C/OEA/CH (4G32)
1--C/OEA/SDS (4G32)
1--C/OEA/NA 4G43)
1--DO/EA 5D38)
1--D/OEAA (4F18)
1--Executive Director (7E12)
1--CPAS/ILS (7G15)
1--f)FA/NFA 4r, 3)
1-- NIC/Analytical Group (7E47)
1-- Research Director (4G48)
1--NIO/Econ (7E47)
1--OGI/ECD (3G46)
1--OGI/FSIC/I (3G46)
1--OCR/ISG (1H19)
1--OCR/OEA (1H18)
Outside:
State :
1--John Monjo, EAP
1--John Maisto, EAP/PHL
1--Verne Dickey, EAP/PHL
1--Ambassador Ernest Preeg, EAP/EP
1--Nicholas Burakow, EB/IFD/OMA
1--John Taylor
1--Alan Kitchens
1--Corazon Foley
1--Majorie Niehaus
1--Dick Hermann
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AID:
1--David Merrill, ANE/SEA
1--Frank Young, ANE/SEA
1--Michael Crosswell, ANE/DP
Treasury:
1--Douglas P. Mulholland
1--William McFadden, IDN
1--William Quinn, IDN
1--Ciro Defalco, IDN
Export-Import Bank:
1--Russell Price
1--Ray Albright
NSC:
Commerce:
1--Byron Jackson
1--William Brown
1--George Paine
1--Ronald Oechsler
1--Richard Childress
1--David Laux
1--Alan Thomas
1--Lt. Col. Robert Cooey, AF/INER
1--James Kelly, ISA
1--James Cossey, ISA
1--Don Eirich, ISA/EAP
1--Lt. Col. William Wise, ISA
Federal Reserve Board
1--Robert Emery
IPAC:
1-Timothy Wright
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