EuroCOIN™: In Brief

• What is EuroCOIN™?

• Why do you need an indicator? Doesn't looking at GDP tell you everything you need to know about the direction of the business cycle?

• How should I interpret the graph of the indicator?

• How is EuroCOIN™ constructed?

• Why are data other than GDP used in the estimation of the indicator?

• Can I measure how much each variable has contributed to the change in the indicator?

EuroCOIN™ is the leading coincident indicator of the euro area business cycle available in real time. The indicator provides an estimate of the monthly growth of euro area GDP – after the removal of measurement errors, seasonal and other short-run fluctuations. The indicator is available very quickly, well before the GDP numbers are released.

Why do you need an indicator? Doesn't looking at GDP tell you everything you need to know about the direction of the business cycle?

No. Looking at GDP can be misleading. In any given month GDP growth may be high or low depending on seasonal effects. In August, for example, GDP falls since most factories in Europe are closed, but this decline does not tell us that Europe is entering a downturn. In addition, GDP is measured with error and is subject to large revisions. For Germany, for example, over the period from 1988 to 1997 estimates of the GDP growth rate based on the final revised data were on average 0.2 percentage points higher than the growth rate estimates based on preliminary data. Reliance on preliminary estimates of GDP growth thus led an excessively pessimistic assessment of German GDP growth. Finally, euro area GDP can be influenced by factors affecting only a particular sector or a particular country. These factors are of no importance for assessing the health of the euro area economy as a whole. 

In order to see the underlying direction in which economy is moving, we need a monthly indicator free from seasonal and other short run fluctuations, from local and sector-specific shocks and from errors in the measurement of GDP. The effects of removing this noise can be seen in the graph below, in which the indicator (black line) and the raw European GDP growth rate (red line) are plotted together (note that GDP growth is released quarterly).

EuroCOIN™ is best thought of as a signal of the underlying direction in which the euro area economy is moving this month. More precisely, it is an estimate of the cyclical component of GDP (after the removal of measurement errors).

So if in a particular month the value of the indicator exceeds GDP growth, it is likely that the low GDP growth is only a temporary phenomenon - a "blip" - which will die out in the next month or two and have no impact on the movement of the cycle.

An additional problem with GDP growth is that it is only available at quarterly frequency, so that not only it does fail to provide information about this month’s economic conditions, but it is also available only with a lag.  Moreover it is available only with a lag. In January 2002, for example, we only have information about GDP in the third quarter of 2001.

If the graph of the indicator has a positive slope, the rate of growth is increasing , i.e. the cyclical component of GDP is accelerating. A negative slope indicates that the rate of growth is decreasing, i.e. the cyclical component of GDP is decelerating. Of course, if the value of the indicator is negative, this indicates that the level of economic activity is falling. We can say that growth is low (high) if EuroCOIN™ is below (above) the historical average of GDP growth (the blue line in the graph).

EuroCOIN™ is based on an innovative econometric method distilling information from the real economy, from the financial sector and from surveys of business and consumer sentiment, weighting each source of information according to its historical correlation with movements of the cycle, while filtering out measurement error and very short run volatility.  More ...

GDP, industrial production and prices for different sectors and countries, financial variables, and other macroeconomic data move together during phases of downswings and upswings. This implies that GDP is correlated with all these variables and historical correlations can be exploited to obtain an accurate estimate of this month’s cyclical movement in GDP – which we don’t know yet. For example, in countries where GDP is measured inaccurately, the data suggest that indicators such as electricity consumption can help us extracting relevant information about the movement of the cycle.

Yes, we can identify the contribution of each of the variables that have been used to construct the indicator: this is an important advantage of our technique. Each month we will be able measure the contribution of each sector and each country to the movement in the cycle. Suppose, for example, that the quarterly growth rate of the index is -0.3 and the corresponding value of the German industrial production component is -0.5. This implies that, if all other factors have remained the same, then German industrial production has tended to reduce the value of the indicator. If it were not for the contribution of the other components, the indicator would have been even lower.
More about CEPR's Business Cycle Research