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METHODOLOGY
FOR DEVELOPING THE
S.C. INDICATORS

Coincident Index    Leading Index    Index Construction

The South Carolina Economic Indicators are designed to provide reliable and timely information about current and future economic conditions in South Carolina. The most concise view of the South Carolina economy is given by the Coincident Index and the Leading Index.

Coincident Index

The Coincident Index is used to track the current performance of the South Carolina economy. This index is comprised of individual data series that have historically moved in conjunction with the state's business cycles. For example, one component of the Coincident Index is the state's unemployment rate. The unemployment rate tends to be generally falling during time of economic expansion, and generally rising during an economic recession. Thus, tracking changes in the unemployment rate contributes to our view of whether the state is currently experiencing an expansion or a recession. The four components of the Coincident Index are as follows:

When the Coincident Index displays a sustained upward trend, the economy is believed to be expanding. A sustained downward trend indicates a recession. Therefore, an occasional month of downward movement does not indicate a recession or even deteriorating economic conditions. On the other hand, 3 to 4 months of consecutive downward movement would be a strong indication that the economy has entered a recession, or has experienced a pronounced slowdown.return to top

Leading Index

The Leading Index provides a gauge of economic conditions roughly 6 months in the future. This index consists of individual data series that have reliably lead business cycles turning points in the past. As an example, initial claims for unemployment insurance is a leading indicator which tends to show a sustained downward trend prior to continued expansion, and a sustained upward trend prior to an economic recession. Thus, during times of economic expansion, sustained increases in the Leading Index suggest that the economy will continue to expand. Meanwhile, during times of economic expansion, a string of decreases in the Leading Index suggests the economy may head into a recession within 6 to 9 months. The 6 components of the South Carolina Leading Index are:

As with the Coincident Index, the Leading Index provides important signals about future economic conditions when there is sustained upward or downward movement, on the order of 3 to 4 months consecutively. Therefore, during an economic expansion, an occasional month of decrease in the Leading Index does not signal a coming end to the expansion. However, at least 3 to 4 months of downward movement does provide a reliable signal that the economic expansion may end within 6 to 9 months.return to top

Index Construction

The exact methodology used to construct the South Carolina Coincident and Leading Indexes is widely used, most notably by The Conference Board in the construction of the U.S. indexes. The procedure was originally developed by the U.S. Department of Commerce.

The basic idea is simple. Each month, the percent change is calculated for each of the relevant component data series. These individual percent changes are then averaged. This average then becomes the change in the index itself. So, for example, the Leading Index represents the cumulated average percent changes of each of the component leading indicators. Basically, if each of the leading indicators record positive movement for the month, the Leading Index will increase that month, with the magnitude of increase determined by the average magnitude of increase in the included leading indicators.

There are, however, some important adjustments that take place in addition to the above brief description. For those interested in a detailed look at constructing the indexes, please follow this link to The Conference Board's Composite Index Methodology (http://www.globalindicators.org/methodology/).return to top