Alphacast Highlight: Tracking Consumption and Investment in real time

By Maia Mindel (mmindel@alphacast.io)

Check out the coincident Consumption Index and the Investment Index

What are Coincident Indexes?

Argentina, as usual, is in the midst of economic turmoil, with two years of recession prior to the COVID pandemic at the end of a decade without any economic growth to speak of. It is widely agreed upon by politicians and experts, across parties, that boosting private investment is one of the key items to resolve these issues, although there is (naturally) widespread disagreement on how to accomplish this. At the same time, real personal consumption has suffered since the 2018-19 recession, and its recovery is a major concern for political and economic reasons alike. Consequently, being able to track fixed investment and private consumption data with higher frequency than the quarterly figures from INDEC's National Accounts publications is of great importance.

We can do just that with a coincident index. A coincident index provides a gauge for the movement of a key economic variable through the use of related data series. In this case, the coincident investment index mirrors one the two largest components of GDP, Private Fixed Investment. Such an index tracks these variables relatively well (see details below), and shows whether these components of aggregate demand are increasing, stable, or decreasing. Both indexes are divided in sections, which are weighed in accordance with their relevance to the variable at hand, and estimated using the latest available data for each.

Methodology

Investment Index

The index is divided between National and Imported Investment, and contains indicators for Construction, Machinery and Equipment, and Transport Equipment. Each section is weighed in accordance with their relevance to the variable at hand, and estimated using the latest available data for it.

Component	Weight	Indicators
Construction	47.2%	Construction Activity, Construction Employment
Machinery and Equipment	41.4%	Machinery Production, Imported Capital Goods
Transportation Equipment	11.3%	Utility Vehicles Sales, Transportation Imports

Each indicator for each component has its own weight, and both are transformed into a base 100 index beforehand to prevent the different scales from interfering with the calculator. The indicators are not seasonally adjusted, but can be through a pipeline. The index will continue being automatically updated, as it was constructed through a pipeline using data which is updated as soon as it is uploaded by its original source. You can read a step-by-step explanation of the process here.

How to make sense of it: With all subindexes displaying positive YoY change, SEIDO’s coincident investment index grew 15.5% YoY in August. This follows a few months of positive but steady performance by all subcomponents of investment throughout 2022. It should be taken into account that certain subcomponents of the index are afffected by a low base of comparison. Total investment, therefore, has not only recovered to but surpassed pre-pandemic levels, although it has still to match the heights reached during 2017.

Consumption Index

The index is divided between Goods and Services, and additionally contains indicators for the consumption of Food and Beverages, Alcohol and Tobacco, Clothing and Footwear, Housing and Utilities, Appliances and Furniture, Transportation, Communications, Education, Healthcare, Recreation and Culture, and Other Services. Similarly to the Investment Index, each section is weighed in accordance with their relevance to the variable at hand, and estimated using the latest available data for it. However, since many sections have multiple components (for instance, Transportation contains vehicle purchases, fuel, and others) the index is more complex in its functioning.

Component	Weight	Indicators
Food and Beverages	22.7%	Baked Goods, Meats, Fruits and Vegetables, Dairy, Beverages, Sweets and Candy
Housing and Utilities	14.5%	Real Estate and Housing Services, Electricity, Heating, Running Water
Transportation	14.5%	Vehicle purchases, Fuels, Transportation Services, Airfare
Recreation and Culture	8.6%	Related goods
Clothing and Footwear	6.8%	Clothing and Footwear production
Restaurants and Hotels	6.6%	Restaurants and Hotels activity
Healthcare	6.4%	Healthcare activity
Home Equipment	5.4%	Appliances, Furniture and Mattresses
Communications	5.3%	Activity in Communications
Other Services	4.3%	Financial Services, Personal and Professional Services
Education	3.2%	Education activity
Alcohol and Tobacco	1.9%	Wine, Cigarettes

Each indicator for each component has its own weight, and both are transformed into a base 100 index beforehand to prevent the different scales from interfering with the calculator. The weight for each product was selected based on the 2017 National Household Expenditures Survey (ENGHO), which reflects the share each product category has on an average family's consumption basket. The indicators are not seasonally adjusted, but can be through a pipeline. The index will continue being automatically updated, as it was constructed through a pipeline using data which is updated as soon as it is uploaded by its original source. You can read a step-by-step explanation of the process here.

How to make sense of it: With all subindexes displaying positive YoY change, SEIDO’s coincident consumption index grew 5% YoY in September 2022. In detail, goods consumption grew 4.9% YoY, while services increased 5.8% YoY. This follows a few months of positive but bumpy performance by most subcomponents throughout 2022, although certain months have yielded negative results for specific sectors. It should be taken into account that certain subcomponents of the index are afffected by a low base of comparison. Total consumption, therefore, has not only recovered to but surpassed pre-pandemic levels, although at a slower at lower pace than invnestment.

Usefulness and Accuracy

The usefulness of constructing, or using, a coincident index is that one can receive a glimpse of upcoming economic trends a few months in advance, and therefore adjust behaviors in turn. A coincident index can provide an useful guide to both observing and analyzing reality, as well as delineating policy recommendations. For instance, it can be seen that the growth rate of investment declined in recent months, and while it has recovered from the 2020 recession rapidly, it is still roughly 10% below 2018 levels. Additionally, it can be broadly inferred that Construction and Machinery and Equipment have seen a smaller depression and a faster recovery, while Transportation Equipment still has a long ways to go.

As long as the indicator proves reliable in forecasting changes in the economic variable at hand, it has a variety of uses related to forecasting, analysis, and investment. As seen above, both the YoY change and the 3-month moving average annual change are fair approximations of the INDEC investment data, meaning it can be relied upon to present an accurate approximation of the upcoming trends in investment.