About the leading indicators

Since February 1981, Statistics Canada has published a composite index of leading indicators each month, to track emerging trends in the economy.

Leading indicators anticipate the short-term course of the economy because they are sensitive indicators of what consumers and businesses actually have begun to buy and produce. It is easy to understand, for example, that building permits and housing starts will lead construction spending, no matter what determines the level of permits and starts. Similarly, new orders for manufactured goods typically foreshadow the short-term course of manufacturing output.

Components

The composite index produced by Statistics Canada has ten components to ensure adequate coverage and back-up. They are the stock market, the money supply, furniture and appliance sales, sales of other durable goods, new orders for durable goods, the ratio of shipments to inventories of finished goods, the average workweek in manufacturing, the real money supply, and the US leading index, and business and personal services employment. Eight are available from 1952 to 1965, 9 from 1966 to 1971 and 10 from 1972.

Smoothing

Statistics Canada uses a 5-month moving average to reduce irregular fluctuations in the leading index. This smoothing allows users to better judge the true underlying signal of the course the economy is likely to take. Smoothing also reduces the effect of revisions that are inevitably made to most of the source data.

Average lead times can be highly variable, and the leading index will always be more volatile than GDP since the components are specifically selected as representing very sensitive indicators of total demand and output.

Weighting

The composite index is the simple, unweighted average of the standardized components. It has been found both here and in the United States that experiments in assigning different weights to the components does not significantly improve the results.

Construction

The composite index is then standardized so that its mean and standard deviation of its growth rate are equal to those of real GDP and its components, respectively. This is done to give the leading index the same trend as GDP, and facilitates comparisons of the two. Finally, the composite is converted to a 1981=100 index.

To take advantage of all available information, we assemble all the components for the latest month available. This implies that January data for five of the components will be combined with the December value of the US leading indicator and the November data on manufacturing and retail trade. This new composite index, which will be published for the first time in February, would be called the composite index for January since the most components refer to this month. These components include the Toronto stock exchange, the money supply, employment in personal and business services, the average workweek in manufacturing from the labour force survey, and housing starts (the average workweek will be benchmarked to the data from the survey of employment, payrolls and hours after two months when this date becomes available, while the housing index will be revised to incorporate house sales when this data is published one month later.