Building Up a Real Sector Confidence Index for Turkey

Ece OralDilara Ece

Türknur Hamsici

CBRT

Outline

Business Tendency Survey (BTS)

The Development of the Real Sector Confidence Index

BTS Characteristics

• Sample Size: 829 (September 2005)• Response Rate: 53 percent (September 2005)• Sampling Unit: Senior Managers• Sampling Method: Non-probabilistic Purposive• Data Collection: Mail, e-mail• Answers: 3-point Likert Scale, multiple choice,

ranking some factors• Sectors covered: mining, food, textiles,

forestry, paper products, chemicals, stone, metals, machinery, energy

What is Business Confidence?

The degree of sentiment towards risk taking by business for whatever reason (Pellissier, 2002).

Aim of the Confidence Index

The confidence index is constructed to provide an indicator of short-term business conditions for economic policy makers and business managers due to the need of early warning indicators in order to foresee financial and economic crises.

The Development of the Real Sector Confidence Index

Reference Series Methodology Emprical Results Interpretation Performance Conclusion

Reference Series

Since the aim of the index is to forecast the expansion and contraction periods of the economic activity, an important indicator is to be chosen as the reference series for comparison.

Methodology

Diffusion Indices Selection of the Potential Series

Diffusion Indices

The method that Sutanto (1999) used for Indonesia case is followed.The scales which are in the form of “more optimistic - the same - more pessimistic” or “up– the same – down” are coded:Answers indicating improvement (better off) are scored 2.Answers showing no change are scored 1.Answers showing a worsening condition are scored 0.

Diffusion Indices

Iv = Ts/N *100%

Iv = Diffusion Index of a Variable

Ts = Total Score

N = Number of Establishments

The Selection of the Potential Series

Standardization and Smoothing Seasonality Cross Correlation Analysis Peak-Trough Analysis Low Volatility Economic Significance Weighting

Standardization and Smoothing

Months for Cyclical Dominance (MCD) moving average procedure can be used.

Seasonality

The business survey series may exhibit significant seasonality.

Seasonality should be treated as statistical noise, be always tested, and, if necessary, corrected for.

Cross Correlation Analysis

The correlation between variables is assumed to be strong when a correlation coefficient is greater than 0.45 in absolute value.

Peak-Trough Analysis

Peak-trough analysis includes examination of the behavior of the diffusion indices per question in relation to the cyclical turning points of the reference series.

Low Volatility

The standard deviation from median of the lead for each series being low is important because the leading time of the series at turning points should be consistent.

Economic Significance

Before the series are accepted as an indicator according to the statistical criteria, there has to be an economic reason.

Weighting

Weighting aims to improve reliability by giving higher weight to better components.

The weights of the components can be given according to their economic significance or statistical adequacy.

Emprical Results

Reference Series Standardization and Smoothing Seasonality Selection of the Series Economic Significance Weighting

Reference Series

The industrial production index, which is available on a monthly basis and an important indicator for the economic activity is chosen as the reference series for comparison.

Standardization and Smoothing

Most of the diffusion indices show MCD values in the range 2-4.

Seasonality

The seasonality of the diffusion indices of each question in BTS is searched. Seasonal influence have little impact on cyclical patterns.

The Selected Series to form Confidence Index

• General Economic Situation• Export Oppurtunities• Investment Expenditures• Total Orders• Monthly Stocks of Finished Goods• Employment (trend of next 3 months)• Production (trend of next 3 months)• Goods sold in Domestic Market (trend of

last 3 months)• Raw Material Stocks (trend of last 3

months)

Cross Correlation Analysis

The correlation coefficients of the selected series and cycles of industrial production index are between 0.45 and 0.666.

Peak-Trough Analysis

The mean lead time of the selected indicators are between 0 and 9; the median lead time of the indicators are between 1 and 8 at all turning points.

Economic Significance

An algorithm which shows all the process that assumed to be thought by the managers before making production decision and describes the production process for Turkey has been derived.

Weighting

The use of the principal component analysis to choose optimal weights illustrate that scores have approximately equal weights.

The Formula used to find the Confidence Index

I = ∑Iv / n

I : Confidence Index n : number of variables

The Interpretation of the Real Sector Confidence Index

• I = 200 (maximum) : all respondents showing an improvement

• I = 100 : number of establishments showing an improvement and worsening conditions are balanced, or such that the general condition of respondents are unchanged

The Interpretation of the Real Sector Confidence Index

• I > 100 : number of establishments showing an improvement is higher than that showing a worsening condition, or such that the general condition of respondent is better

• I < 100 : number of establishments showing an improvement is lower than that showing a worsening condition, or such that the general condition of respondent is worse

The Performance of the Real Sector Confidence Index

50

60

70

80

90

100

110

120

Mar

c.88

Sep.

88M

arc.

89Se

p.89

Mar

c.90

Sep.

90M

arc.

91Se

p.91

Mar

c.92

Sep.

92M

arc.

93Se

p.93

Mar

c.94

Sep.

94M

arc.

95Se

p.95

Mar

c.96

Sep.

96M

arc.

97Se

p.97

Mar

c.98

Sep.

98M

arc.

99Se

p.99

Mar

c.00

Sep.

00M

arc.

01Se

p.01

Mar

c.02

Sep.

02M

arc.

03Se

p.03

Mar

c.04

Sep.

04M

arc.

05Se

p.05

80

85

90

95

100

105

110

115

120Business Confidence IndexCycles of Industrial Production Index (right scale)

Gulf War

Russian Crises Bottom of 2001

Crises

Economic Recession

1994 Crises

The Performance of the Real Sector Confidence Index

50

60

70

80

90

100

110

120

Mar

c.8

8S

ep.8

8M

arc.

89

Sep

.89

Mar

c.9

0S

ep.9

0M

arc.

91

Sep

.91

Mar

c.9

2S

ep.9

2M

arc.

93

Sep

.93

Mar

c.9

4S

ep.9

4M

arc.

95

Sep

.95

Mar

c.9

6S

ep.9

6M

arc.

97

Sep

.97

Mar

c.9

8S

ep.9

8M

arc.

99

Sep

.99

Mar

c.0

0S

ep.0

0M

arc.

01

Sep

.01

Mar

c.0

2S

ep.0

2M

arc.

03

Sep

.03

Mar

c.0

4S

ep.0

4M

arc.

05

Sep

.05

20

40

60

80

100

120

140Business Confidence IndexDiffusion Index of Investment Expenditures (right scale)

Conclusion

The real sector confidence index has the leading indicator capability for the economic activity and it is an indicator for the business confidence based on the Business Tendency Survey.

References• Nilsson, R. (1999). “ Business Tendency Surveys

and Cyclical Analysis”. Business Tendency Surveys, Proceedings of the First Joint OECD-ADB Workshop, Manila, November.

• Pellissier, G.M. (2002), “Measuring Business Confidence in South Africa”, Presented at the 26th CIRET Conference, Taipei, October.

• Sutanto, A. (1999). “Business Confidence Index, Consumer Confidence Index and Index of Leading Indicators: An Experiment for Indonesia”. Business Tendency Surveys, Proceedings of the First Joint OECD-ADB Workshop, Manila, November.