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Southern Nevada Index of Leading Economic Indicators

Following last month's marked decline of 1.39 percent, the Southern Nevada Index of Leading Economic Indicators revealed a pause for April (using February data). The index turned positive by only 0.7 percent. We find the weakness of the construction series in the index, all of which contributed negatively to the index, balancing the other series.

This month's weak rebound from last month's decline offers support to our story of a marked decline in overall activity that began with the new year: the Index foretells weakness for midyear 2008.

R. Keith Schwer

Development of the Southern Nevada Index of Leading Economic Indicators

The Center for Business and Economic Research is a leader in the development of state and local indexes of leading indicators. Our current Southern Nevada Index has demonstrated a high degree of reliability in predicting future economic activity. The following are excerpts from a condensed version of a 1995 paper written on the subject by Dr. Ricardo Gazel and Robert Potts.

The southern Nevada economy has experienced astonishing growth rates in the last several years. This fast economic growth has created an increased demand for economic information and forecasts of future economic performance. The Center for Business and Economic Research (CBER) at the University of Nevada, Las Vegas, is frequently asked to supply information on population growth, employment, visitor volume, building permits, gross gaming revenues, and taxable sales. Many private and public decision makers need updated and reliable information on the current and future state of the local economy in order to design their investment plans, to reorganize their production structures, and to adjust their own future forecasts.

No longer do one, two, or three variables tell the entire story. It has become more difficult to identify economic indicators which can, in a reliable and timely fashion, help us grasp the current and future path of economic growth in southern Nevada. In order to fulfill this demand, CBER has developed an index of leading economic indicators which will provide information in a condensed and systematic way. An indicator that describes the current state of an economy is called a coincident indicator. One which anticipates or predicts economic activity in the future is called a leading indicator.

The Southern Nevada Index of Leading Indicators is composed of 10 economic series, based on criteria used to build the National Index of Leading Indicators. The series and their respective weights are as follows:

• Residential building units permitted 0.7
• Residential building valuation 0.9
• Commercial building permits 1.0
• Commercial building valuation 1.4
• Taxable sales 1.0
• Air passengers enplaned and deplaned 1.0
• Sales of gasoline (gallons) 1.2
• Gross gaming revenues 1.4
• Visitor volume 1.1
• Conventions held attendance 0.5
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An adjusted score system was used to choose the 10 series listed above. The challenge associated with the construction of a regional leading index is acquiring time series data sufficiently long to be tested against regional business-cycle fluctuations. This is a significant issue when developing an index and continued efforts to improve the quality and timeliness of the component series is an ongoing effort in its maintenance.

The most important criterion used to choose the components of the index was the economic importance of each series. The main indicator for this sector is still gross gaming revenues. Additionally, series such as visitor volume, air passengers, and attendance to conventions are related to the hotel/gaming sector but are also closely related to other economic activities such as eating, drinking, entertainment, transportation, and trade. Construction is represented by residential and commercial building permits. Because building permits can be misleading in terms of numbers, the valuation of those permits is also included in the index. The internal market is also represented by the value of taxable sales.

The second criterion is statistical adequacy which measures the overall quality of the reporting system for each series (directly or indirectly), coverage of time period of data collection for the specific series, frequency of revisions, length of series, and comparability over time.

The third criterion is timing. This criterion was adapted for the regional data characteristics and measures how well the series led, coincided, or lagged the actual fluctuation of the economy. A good measure of regional business cycles is not available since data on the gross state product is associated with many empirical problems. For the index we used fluctuations of industrial employment data as a proxy for the regional business cycle. Using taxable sales was considered but there were data collection and accuracy issues that were difficult to reconcile. During the development of the index, only two complete cycles were observed in the available employment data. Both cycles coincided with the recent national recessions although the magnitude of the regional fluctuations were much smaller than the national changes. One probable reason is the larger share of services in the local economy compared to a much higher share of manufacturing in the economy of the country as a whole. Due to this data problem the timing criterion played a much weaker role in selecting regional indicators for the index.

The fourth criterion is conformity to cyclical variations. Again, the same data problem applies here; i.e., the lack of a longer employment time series created a constraint in applying this criterion in selecting a series to compose the regional index. However, the series were compared to actual changes in employment to observe if they rose during employment expansion and declined during employment contractions.

The fifth criterion is the conjugation of smoothness and the currency of the series which was used to exclude series subject to large erratic variations as well as those series not promptly available to be part of the index. Although less important in theoretical terms, these two criteria played a stronger role in eliminating many series from the regional index, especially the currency criterion. Some series originally evaluated showed large delays in their release and were eliminated from the index.

These five criteria were applied to the original series available and ten of them were chosen to be part of the index. It is important to stress that the index must be revised on a periodic basis as more series become available and the performance of the actual components of the index is evaluated vis-a-vis new (future) regional economic fluctuations.

The Southern Nevada Index of Leading Indicators performed well when compared to employment variations for the local economy. It led the employment figures by an average of four to six months in low-growth periods and by two to three months in rapid-growth periods. For recent regional recessions the index has presented negative rates of growth when compared to its own previous 12-month average. With the exception of rare false negatives, the index has forecasted well the variations of the local economy. However, the interpretation of the index must be made very carefully. Monthly changes do not explain a trend, it is the variations of the index over time that help to forecast the future local economic conditions.

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