Identification of economic activity indicators

Abstract

Traditional economic indicators like PMI, etc must be supplemented with the leading economic indicators that are more in sync with the present conditions and trends to guide the policy decisions pro-actively and with adequate information. The current problems with the traditional indicators have been delayed reporting, and not representative of some aspects of the economy. With the economic conditions deepening and the onset of digitisation, these traditional indicators fail to capture the real picture of the economy. Here we propose a set of leading economy indicators that will help in estimating business cycles, and uncertainties and volatilities in the economy with their data being available at greater frequency intervals. The few conditions that were imposed while selecting such indicators include – they should be measurable and not estimated and should be leading that is observed changes in them should align with the changes in economic conditions later. After putting together 12 set of probable economic indicators, based on their data availability, we have finalised 5 leading economic indicators that show a correlation of 85.9% between quarterly growth in GDP and monthly indicators dataset and a R-squared value of 0.81. The future scope of this exploratory analysis would be to establish the robustness of the model through out of sample forecast for the FY 2022.