Barometric Techniques

When there is no clear pattern in a time series data this is an alternative approach to forecast or anticipate short-term changes in economic activity or turning points in business cycles is to use the index of leading economic indicators. These are time series that tend to lead changes in the level of general economic activity Just as changes in mercury in a barometer precede changes in weather conditions so if is called barometric methods. Economic forecasters, especially in the U.S.A., have always tried to search out certain indicators of a change in economic activity. A general business indicator is a series of index of several different business activities combined into one general index of business activity. There is no simple indicator when even provides a consistent signal for change. But there are well known time series that have served as barometers of change.
The pioneering work in this area has been done by the economic at the National Bureau of economic research (U.S.A.). They have classified economic time series into three broad categories: leading indicators, coincident indicators and lagging indicators. These indicators provide signals or indications of changes in economic activity, such as national income, or national product, the level of employment or the rate of price inflation.
Leading Indicator: If the changes in one series consistently occur prior to changes in another series a leading indicator has been identified. In figure 2.8 (a) series A can be considered a leading indicator of series B because the peaks and through consistently occur ahead of series B.
Coincident Indicator: If two series of data frequently move up or down at the same time, one series may be regarded as a coincident of other. For example in figure 2.8 (b) series A is coincident indicator of series B.
Lagging Indicator: The lagging indicators move up or down after the leading indicators have moved. There is a time lag. For example, the bank rate is the leading indicator: the rate of interest charged by commercial bank is coincident indicator, and the rate of interest charged by the money lender is a lagging indicator.
Composite Indices: Composite barometric indices are established to over come the unreliability of single barometric indicator. Composite index is prepared by aggregating several leading indicators. The main merit of this method is that it takes account of movement not in one indicator but in several leading indicators. The composite leading index points out more reliably turning points in the future demand for a particular product.
Diffusion Index: Diffusion index shows the proportion of the total number of series in a selected collection that are rising at any point of time. For example, to forecast GNP, if diffusion index exceeds 50 percent, we can predict that GNP will be increasing and when it is less than 50 percent, we expect that GNP will be declining.