30th CIRET Conference, New York, October 2010

Unobserved component model with observed cycle

Use of BTS data for short-term forecasting of manufacturing production
Sawomir Dudek Dawid Pachucki
The Research Institute for Economic Development (RIED) The Warsaw School of Economics (WSE)

Abstract Business tendency survey data (BTS) is often used as an indicator of the cyclical fluctuations in the real economy. The outcome of many empirical studies is that the survey data is usually leading or coincident with the quantitative one. In our paper we are using this property of the BTS to make short-term forecasts of manufacturing production. For that purpose, the unobserved component model (UCM), also known as the structural time series model was used. Within this model the time series of manufacturing production is decomposed into unobserved components: the trend, the cycle. It was assumed that the trend is approximated with an univariate time series model. As to the "unobserved cyclical component" it was assumed that it is common for reference quantitative variable and qualitative variable. In that sense the cyclical fluctuation can be approximated by the fluctuations of BTS indicators. Such specification can be called Unobserved component model with observed cycle" (UCM-OC). Such specified system was estimated with the application of Kalman filter technique. Then the model was used for making recursive one-period ahead forecasts to check its out-of-sample data fit. In addition the forecasting properties were evaluated against alternative models, ie, "pure" UCM and ARIMA model. The analysis was performed for Poland and selected European Union countries.

Key Words:

industrial production, business tendency survey, short-term forecasting, unobserved component model E23, E27, E32, C22, C53

JEL Classification:

Unobserved component model with observed cycle

1.

Introduction

Business tendency survey data (BTS) is often used as an indicator of the cyclical fluctuations in the real economy. The outcome of many empirical studies is that the survey data is usually leading or coincident with the quantitative one. In our paper we are using this property of the BTS to make shortterm forecasts of manufacturing production. For that purpose, the unobserved component model (UCM), also known as the structural time series model was used. Within this model the time series of manufacturing production is decomposed into unobserved components: the trend and the cycle. It was assumed that the trend is approximated with an univariate time series model. As to the "unobserved cyclical component" it was assumed that it is common for reference quantitative variable and qualitative variable. In that sense the cyclical fluctuation can be approximated by the fluctuations of BTS indicators. Such specification can be called Unobserved component model with observed cycle" (UCM-OC). Then the model was used for making recursive one-period ahead forecasts to check its out-of-sample data fit. In addition the forecasting properties were evaluated against alternative models, ie, "pure" UCM and ARIMA model. The analysis was performed for Poland and selected European Union countries: Germany, France, Italy and United Kingdom. The reference variable is index of manufacturing production, seasonally adjusted. As qualitative variables there are used three BTS indicators: ICI industrial confidence indicator IPT balance on question regarding production trend observed in recent months IPE balance on question regarding production expectations.

2.

General methodology

The main purpose of our research is to assess whether the information included in the qualitative data (BTS data) allows for improving the forecast of the quantitative variables. To carry out the analysis first a benchmark model was selected, as a comparison for the forecast. It terms of forecasts of an manufacturing production time series an univariate model such as an ARIMA model seemed suitable. After short research and tests of various alternatives we decided to use as a benchmark the ARIMA (1,1,0) model which on average provided us with the best forecasts for all the analysed countries. The next step was the selection of an multivariate model to include the information from qualitative variables. In this case we decided to use the unobserved component models (UCM), also known as the structural time series model, which seem to have some advantages compared to other possible time series specifications, like for example ARIMA, ARIMAX models. The most important is the direct economic interpretation of components in the model. Such models can also deal with multivariate series, some data irregularities like structural brakes and missing observations. Flexibility of the state space models in terms of suitable formulation of particular components, possibility of work with no stationary time-series and the solution algorithm offered by the recursive procedure which is Kalman filter, makes them quite a powerful tool for economic analysis . The main disadvantage of the methodology seems to be relatively high sensitivity of the solution to the initial parameters used for computing. We used UCM specification which allow to decompose the time series of manufacturing production into unobserved components: the trend, the cycle. Taking into account fact that business

Unobserved component model with observed cycle

tendency survey data (BTS) are often used as an indicators of the cyclical fluctuations in the real economy the specification is assuming that "unobserved cyclical component" can be extracted basing on the behaviour of qualitative indicator. In that sense unobserved cyclical fluctuation are in fact observed in fluctuation of qualitative indicator. So we decided to call our model: "Unobserved component model with observed cycle" (UCM-OC). Next to the work of Planas, Roeger and Rossi (2009) we decided for following state space representation of our model:

yt = tt + ct BTSt = BTS + * ct + aBTS tt = t 1

t = * (1 ) + * t 1 + at
ct = c1 * ct 1 + c 2 * ct 2 + act

(1)

The first two equations are so called signal or measurement equations which describes relationship between observed: country X manufacturing production ( yt ) and country X selected BTS indicator ( BTS t ), and unobserved trend ( tt ) and cycle ( ct ). The next tree equations of the system (1) named in literature the state or transition equations, describes the behaviour of unobserved components. In terms of the cycle which in the model is kind of common component for the manufacturing output and the BTS indicator, an AR(2) process is assumed. For the trend (third and fourth equations of the above system) the dumped trend process is being considered. We tested different trend specification in the system (1) (Pedregal 2002), however the dumped trend proposed above seems to fit the best all the analyzed time series. The smoothing behaviour of the trend for being constrained to take values between 0 and 1 (if there is no additional shock to the system) is a quite good approximation of the behaviour of economic time series (Grander, McKenzie 2009). The a BTS , at , act are white noise processes. As a qualitative variable we used separately three indicators: the industrial confidence indicator (ICI) with 1 month lead to the common cycle, the balance on question regarding production expectations (IPE) with 1 month lead, and the balance on question regarding production trend observed in recent months (IPT) as coincident. Hence we estimated three models respectively: UCM-ICI, UCM-IPE and UCM-IPT. Bearing in mind the above mentioned advantages of the unobserved component models over ARIMA models, as an alternative we also tested univariate version of the system (1), where the only observed signal is for manufacturing production, i.e. specification without second equation. This model will be indicated as UCM. For out-of-sample analysis purposes from the whole time sample last P=39 observations were excluded to compare forecasting properties. The exclude sample covers period 2007:M1-2010:M3 to check to assess the models reaction to the last global financial crisis. Thus the starting estimation sample include T=180 observations, it covers period 1992:M1-2006:M12 (for Poland sample starts from 1992:M3). Using defined above models (ARIMA(1,1,0), UCM, UCM-ICI, UCN-IPE, UCM-IPT), 39 point (one month ahead) forecasts were calculated recursively with re-estimation of that models. At each recursion the estimation sample was increased by one month forward and forecasted point (month) also. For all models there were calculated forecast errors for out-of sample and average measures like root mean squared error (RMSE) and mean absolute error (MAE).

Unobserved component model with observed cycle

RMSE =

1 P 2 et = P t =1

1 P yt yt f P t =1

(2)

MAE =

1 P 1 P et = yt ytf P t =1 P t =1

(3)

In order to check whether the forecasts from UCM-OC models are superior to the forecasts from reference benchamrk, there were calculated relative RMSEs and MAEs, i.e. ratios of the root mean squared errors and mean absolute errors of the UCM-OC models to the reference ARIMA model. The relative RMSE is called also as a Theils ratio (called in some papers as a U statistic). If Theils U statistic or relative MAE is smaller than one, then the forecasts based on the BTS indicators are superior to the forecasts of the benchmark model. To check weather forecast superiority is statistically significant we focus on the test of equal predictive accuracy of Diebold and Mariano (1995), which is widely used for comparing forecasts of two competing models. We use Diebold-Mariano test with squared error loss function and with absolute error loss function. The loss differentials for out-of-sample are calculated as:

d tsqr = etUCM OC etARIMA d tabs = etUCM OC etARIMA

where et
UCM OC

) (
2

(4)

(5)

, etARIMA are forecast errors from competing models.

hypothesis H 1 : E (d t ) = different from zero. When module of Diebold-Mariano test statistics (used

Two forecasts have equal accuracy if and only if the loss differential (4 or 5) has zero expectation for all t. Thus the null hypothesis of equal predictive accuracy is H 0 : E (d t ) = 0 versus the alternative

for 4 or 5) is higher than critical value with given significance level than null hypothesis of equal predictive accuracy have to be rejected. When Diebold-Mariano test statistics is negative and empirical p-value is less then assumed significance level (e.g. 5% or 10%) than forecasts received form UCM-OC models are significantly superior to the forecasts from ARIMA model. It should be underlined that all the forecast errors used to calculated above statistics for each period in out-of-sample have the same weight, henceforth we call them unweighted. But in many practical situations precise forecasts for some periods are more important than for others. For example, accurate forecasting of the beginning of a recession is of special importance. In case of manufacturing production, which is strongly affected by cyclical fluctuations it is especially important. Very often the start of a recession correspond with a large decrease of manufacturing production. Hence, when selecting among competing forecasting models, it makes sense to focus on these crucial observations and to put more weight on the errors in this periods. For this purpose, we use approach proposed by van Dijk et al. (2003). To compare forecast accuracy they proposed modified Diebold-Mariano statistic by using a weighted average loss differential. As an examples of sensible weighting function they proposed to use empirical cumulative density function of forecasted variable. Basing on CDF we can construct left tail (LT) weighting function and right tail (RT) weighting function. First one is putting more weight on periods when high

Unobserved component model with observed cycle

rate of growth of reference variable is observed, second one opposite, when rate of change is largely negative. Formally, the weight functions for the left tail and right tail are given by:

LT : wtLT = 1 ( yt ) RT : wtRT = ( yt )

(6)

where ( yt ) denotes the empirical cumulative density function of forecasted variable. In our paper we use distribution of log-change of reference variable because forecasting models are constructed on levels. Figure 1 depicts the empirical cumulative density functions of reference variable for analyzed countries which are used to construct weights. Using above defined weights (6), weighted forecast errors are calculated:

etw = wt et

(7)

This weighted errors are used to calculate relative RMSEs, MAEs and loss differentials (4 and 5) for Diebold-Mariano test. In all experiments, the competing forecasts are evaluated using unweighted and weighted (left tail and right tail weights) versions of the Diebold-Mariano test statistic and weighted and unweighted relative RMSEs and MAEs.

Unobserved component model with observed cycle

Figure 1

Empirical CDFs for dlog of reference variable.

DLOG_DE_IP_SA DLOG_FR_IP_SA 1.0 0.8 Probability 0.6

1.0 0.8 Probability 0.6

0.4 0.2 0.0 -.08 -.06 -.04 -.02 .00 .02 .04

0.4 0.2 0.0 -.04 -.03 -.02 -.01 .00 .01 .02

DLOG_IT_IP_SA 1.0 0.8 Probability 0.6 0.4 0.2 0.0 -.04 -.03 -.02 -.01 .00 .01 .02 .03 Probability 1.0 0.8 0.6 0.4 0.2 0.0

DLOG_PL_IP_SA

-.05 -.04 -.03 -.02 -.01 .00

.01

.02

.03

.04

.05

DLOG_UK_IP_SA 1.0 0.8 Probability 0.6 0.4 0.2 0.0 -.025 -.015 -.005 .000 .005 .010 .015 .020

Source: Own calculation; DLOG_ first difference of logarithm of reference variable.

Unobserved component model with observed cycle

3.

Predictive power of UCM-OC models with BTS indicators (out-ofsample analysis).

The UCM models, both univariate an multivariate versions, where identified for all the countries. The only exception was Poland, where the univariate UCM identified the cycle with really strange behaviour. The model had some problems with differentiate the trend and a the component of business cycle frequencies. The only possibility to deal with this issue was to put some additional constrains in the UCM, which made the model for Poland different form the others. As we decided to not differentiate the systems for particular countries, in the further analysis the univariate unobserved component model for Poland is skipped. This is a good example that this kind of models are quite sensitive to the assumed parameters and formulation of particular components. On the other hand, the multivariate specification allowed for solving the problem. As was mentioned in the methodological part, to assess whether the UCM-OC model outperform the benchmark we are looking for lower than one values for relatives MAE and RMSE or negative values for Diebold-Mariano statistics (DM-t-sqr and DM-t-abs). All the results are presented in Tables 1a-1c. Comparison of unweighted forecast errors do not provide clear answer (see also Figure 2) to the key question posed in the paper. On average, the forecast errors seem to be lower in the UCM-OC type of models, however the Diebold-Mariano tests do allow for the statement that the difference is statistically significant. On the other hand, in case of UK, the ARIMA(1,1,0) model provides significantly better forecasts except the UCM-OC model where the IPT index was used as indicator for the cycle. In this case there was no significant difference in the quality of the forecast between UCMIPT and ARIMA model. Another finding is that in general the multivariate version of UCM provides lower forecasts errors than the univariate one. However for particular countries the confidence indicator which allowed for reduction of the error was different. In case of Germany it was IPT, for France - IPE, Italy IPT, Poland ICI, and UK IPT. After giving weight for the periods of high growths (Table 1b right tail weighting function) or high drops (Table 1c left tail weighting function) the conclusions changed. In case of high positive growth rate (expansion phase) the simple ARIMA model seem to outperform the UCM approach. It is possible to identify at least one UCM model for Germany, Poland and UK where at 10% significance level the ARIMA forecasts where better then the UCM. In case of France it is 12% significant level. In case of Italy or other not identified above models, the differences was statistically not significant, what means that forecasts accuracy is the same for both types of the models. From the Figure 2 it is visible that on general UCM models with qualitative indicators in terms of forecast accuracy performed better during the period of intensification of global finance crisis (end of 2008). Better performance of the UCM models when left tail weighting function is used is also proved by analysis of relative RMSE sans MAEs (Table 1c). For all countries (except UK) the relative average error statistics are lower than one. In the case of Poland and Italy UCM-OC models were able to provide significantly better (according to DM statistics) forecast than the benchmark. In other cases, left tail weighting do not significantly improved the UCM performance compared to the conclusions for unweigted errors, however relative RMSEs and MAEs are lower than one.

Table 1a
Country DE

Evaluation of the out-of-sample forecasting power of BTS indicators (unweighted).

Model UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT 0,990 1,049 1,053 1,045 1,277 1,426 0,860 MAE 1,061 1,118 0,993 0,975 0,974 0,881 0,858 0,983 1,019 0,946 0,988 0,887 Rank 3 4 2 1 3 2 1 4 4 2 3 1 1 2 3 2 3 4 1 0,953 1,028 1,022 1,046 1,196 1,410 0,842 RMSE 1,008 0,904 0,848 0,835 0,982 0,804 0,794 0,855 0,990 0,917 0,945 0,840 Rank 4 3 2 1 4 2 1 3 4 2 3 1 1 3 2 2 3 4 1 -1,30 0,56 0,95 1,73 1,98 2,04 -0,76 DM-t sqr 0,13 -0,53 -0,93 -1,01 -0,56 -1,25 -1,18 -0,83 -0,79 -1,59 -1,03 -1,53 0,20 0,58 0,35 0,09 0,05 0,05 0,45 DM-t prob sqr 0,90 0,60 0,36 0,32 0,58 0,22 0,25 0,41 0,43 0,12 0,31 0,13 -0,22 0,74 1,85 1,46 2,03 2,33 -0,71 DM-t abs 1,50 0,73 -0,06 -0,19 -0,59 -0,98 -0,99 -0,12 0,62 -1,02 -0,20 -1,13 0,83 0,46 0,07 0,15 0,05 0,03 0,48 DM-t prob abs 0,14 0,47 0,95 0,85 0,56 0,33 0,33 0,91 0,54 0,31 0,84 0,26

FR

IT

PL

UK

a) RMSE, MAE relative root means square error and mean absolute error of UCM-OC models over benchmark ARIMA(1,1,0) model, value less than 1 indicate superiority of UCM-OC model, Rank ranking of models based on relative RMSE, MAE. b) DM-t sqr, DM-t prob sqr Diebold-Mariano t-statistics and empirical p-value for test with squared error loss function, ) DM-t abs, DM-t prob abs Diebold-Mariano t-statistics and empirical p-value for test with absolute error loss function, negative DM-t statistics means that on average forecast errors from UCM-OC models are lees than from benchmark model, p-value empirical significance level, if less than 5 or 10% than accuracy of one model is significantly better than rival one.

Figure 2

Forecast errors for particular models and countries.

DE FR
3 2

1 0

0 -1 -2 -4 -3 -8 -4 -5 -12 I II III 2007 ARIMA UCM-IPE IV I II III 2008 UCM UCM-IPT IV I II III 2009 UCM-ICI IV I 2010 -6 I II 2007 ARIMA UCM-IPE III IV I II III 2008 UCM UCM-IPT IV I II III 2009 UCM-ICI IV I 2010

IT
6 10.0 7.5 5.0 2 2.5 0.0 -2.5 -5.0 -4 -7.5 -10.0 I II III 2007 ARIMA UCM-IPE IV I II III 2008 UCM UCM-IPT IV I II III 2009 UCM-ICI IV I 2010 I II 2007 III IV I II

PL

-2

-6

III 2008

IV

II

III 2009

IV

I 2010

ARIMA UCM-IPE

UCM-ICI UCM-IPT

UK
3 2 1 0 -1 -2 -3 -4 -5 I II III 2007 ARIMA UCM-IPE IV I II III 2008 UCM UCM-IPT IV I II III 2009 UCM-ICI IV I 2010

Table 1b
Country DE

Evaluation of the out-of-sample forecasting power of BTS indicators (weighted right tail).
Model UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT 1,111 1,301 1,138 1,027 1,358 1,433 0,977 MAE 1,206 1,399 1,128 1,117 0,979 0,997 0,960 1,254 1,054 1,035 1,076 1,065 Rank 3 4 2 1 2 3 1 4 4 1 3 2 1 3 2 2 3 4 1 1,096 1,327 1,131 1,016 1,147 1,218 0,818 RMSE 1,266 1,207 0,961 0,979 0,985 0,997 0,952 1,291 1,025 1,068 1,086 1,113 Rank 4 3 1 2 2 3 1 4 1 1 3 4 1 3 2 2 3 4 1 1,53 2,03 1,66 1,22 0,77 1,39 -0,61 DM-t sqr 1,34 1,49 -0,25 -0,14 -0,35 -0,03 -0,40 1,61 1,22 1,12 1,27 1,23 0,14 0,05 0,11 0,23 0,45 0,17 0,55 DM-t prob sqr 0,19 0,14 0,81 0,89 0,73 0,98 0,69 0,12 0,23 0,27 0,21 0,23 1,47 1,68 1,82 1,18 1,25 1,73 -0,09 DM-t abs 2,04 2,28 0,88 0,82 -0,52 -0,03 -0,36 1,57 1,33 0,54 1,28 0,65 0,15 0,10 0,08 0,25 0,22 0,09 0,93 DM-t prob abs 0,05 0,03 0,39 0,42 0,61 0,98 0,72 0,12 0,19 0,59 0,21 0,52

FR

IT

PL

UK

a) RMSE, MAE relative root means square error and mean absolute error of UCM-OC models over benchmark ARIMA(1,1,0) model, value less than 1 indicate superiority of UCM-OC model, Rank ranking of models based on relative RMSE, MAE. b) DM-t sqr, DM-t prob sqr Diebold-Mariano t-statistics and empirical p-value for test with squared error loss function, ) DM-t abs, DM-t prob abs Diebold-Mariano t-statistics and empirical p-value for test with absolute error loss function, negative DM-t statistics means that on average forecast errors from UCM-OC models are lees than from benchmark model, p-value empirical significance level, if less than 5 or 10% than accuracy of one model is significantly better than rival one.

Unobserved component model with observed cycle

Table 1c
Country DE

Evaluation of the out-of-sample forecasting power of BTS indicators (weighted left tail).
Model UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT UCM UCM-ICI UCM-IPE UCM-IPT 0,901 0,866 0,991 1,055 1,229 1,422 0,791 MAE 0,972 0,947 0,910 0,889 0,972 0,815 0,800 0,828 0,996 0,891 0,934 0,777 Rank 4 3 2 1 4 2 1 3 4 2 3 1 2 1 3 2 3 4 1 0,881 0,854 0,973 1,051 1,161 1,423 0,799 RMSE 0,925 0,741 0,774 0,754 0,979 0,735 0,727 0,706 0,973 0,856 0,888 0,720 Rank 4 1 3 2 4 3 2 1 4 2 3 1 2 1 3 2 3 4 1 -1,84 -1,76 -1,12 1,89 1,33 1,48 -1,23 DM-t sqr -1,23 -1,11 -1,08 -1,14 -0,92 -1,40 -1,33 -1,31 -1,17 -1,85 -1,76 -1,90 0,07 0,09 0,27 0,07 0,19 0,15 0,23 DM-t prob sqr 0,23 0,27 0,29 0,26 0,36 0,17 0,19 0,20 0,25 0,07 0,09 0,07 -1,09 -1,10 -0,24 2,32 2,12 2,21 -1,17 DM-t abs -0,55 -0,28 -0,59 -0,67 -1,03 -1,20 -1,18 -0,98 -0,11 -1,37 -1,07 -1,78 0,28 0,28 0,81 0,03 0,04 0,03 0,25 DM-t prob abs 0,58 0,78 0,56 0,51 0,31 0,24 0,24 0,33 0,91 0,18 0,29 0,08

FR

IT

PL

UK

a) RMSE, MAE relative root means square error and mean absolute error of UCM-OC models over benchmark ARIMA(1,1,0) model, value less than 1 indicate superiority of UCM-OC model, Rank ranking of models based on relative RMSE, MAE. b) DM-t sqr, DM-t prob sqr Diebold-Mariano t-statistics and empirical p-value for test with squared error loss function, ) DM-t abs, DM-t prob abs Diebold-Mariano t-statistics and empirical p-value for test with absolute error loss function, negative DM-t statistics means that on average forecast errors from UCM-OC models are lees than from benchmark model, p-value empirical significance level, if less than 5 or 10% than accuracy of one model is significantly better than rival one.

11

4.

Conclusions

It is possible to find UCM-OC model which provides at least as good forecasts as ARIMA benchmark. In general the UCM-OC models had lower forecast errors, however the priority over simple ARIMA ones was not statistically significant. The top identified UCM-OC models were as follows: for Germany: UCM-IPT, for France: UCM-IPE, for Italy: UCM-IPT, for Poland: UCM-ICI, for United Kingdom: UCM-IPT. The best indentified models under UCM-OC methodology significantly (10%) over performed the ARIMA models for Italy and Poland in the downward phase of the cycle. As was mentioned in the paper, in case of univariate UCM for Poland it was not possible to indentify reasonable cycle and trend under common model. On the other hand, some additional constrains let to received satisfactory results. This allow us to expect that the relaxation of one type of model for all courtiers constraint can additionally improve the quality of forecasts from the UCM-OC representation. This hypothesis was not a subject of present analysis, however it appears to be a good extension for the paper in the nearest future.

Unobserved component model with observed cycle

References
Diebold, F.X. and R.S. Mariano (1995), Comparing Predictive Accuracy, Journal of Business & Economic Statistics 13, 253-263. Dijk, van D. and P. H. Franses (2003), Selecting a Nonlinear Time Series Model using Weighted Tests of Equal Forecast Accuracy, Oxford Bulletin of Economics and Statistics, 65, 727744. European Commission DG ECFIN (1997), The Joint Harmonised EU Programme of Business and Consumer Surveys, European Economy Report and Studies, No 6, Brussels. European Commission DG-ECFIN (2007), The Joint Harmonised EU Programme of Business and Consumer Surveys - User guide. Harvey, A.C. (1985), Trends and Cycles in Macroeconomic Time Series, Journal of Business and Economic Statistics, Vol. 3(3), 216-227. Harvey, A.C. (1989), Forecasting, Structural Time Series Models and the Kalman Filter, Cambridge University Press, Cambridge, New York and Melbourne. Kuttner K. (1994),Estimating potential output as a latent variable, Journal of Business and Economic Statistics,12,3,361-368. Planas C., Roeger W., Rossi A. (2009), Improving real-time TFP cycle estimates by using capacity utilization European Commission, Joint Research Centre.

13

Unobserved component model with observed cycle

Appendix 1: Definitions and data sources

All variables used in the paper are encoded in a uniform manner. The syntax of the variable code is as follows: [country code]_[variable code]_SA where: _SA means seasonal adjustment. Country codes according to EUROSTAT: Germany DE France FR Italy IT Poland PL United Kingdom - UK

Index of manufacturing production (IP) Description Index of manufacturing production (NACE Rev.2), monthly frequency, 1992.012010.03, single-base index 2005=100, seasonally adjusted. Source EUROSTAT: on-line database: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database Industry production index - monthly data - (2005=100) (NACE Rev.2) (sts_inpr_m) OECD: on-line database only for Poland for years 1992-1994 http://stats.oecd.org Dataset: Production and Sales (MEI)/Production in total manufacturing sa, 2005=100 Business tendency survey industry (ICI, IPE, IPT) Description Business tendency survey industry, monthly frequency, 1992.01-2010.03, seasonally adjusted. ICI industrial confidence indicator is the arithmetic average of the balances (in percentage points) of the answers to the questions on production expectations, order books and stocks of finished products (the last with inverted sign). according to EU definition, balances for questions from harmonized questionnaire (see EC DG-ECFIN 2007). IPT Production trend observed in recent months - balance IPE Production expectations for the months ahead balance. EUROSTAT: on-line database: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database Business surveys (Source: DG ECFIN)/ Business surveys - NACE Rev. 1.1/Industry - monthly data (bsin_m) The Research Institute for Economic Development (RIED), The Warsaw School of Economics (WSE): Business Activity in Manufacturing Industry periodic survey.

Source

14

Unobserved component model with observed cycle

Appendix 2: Graphs
Figure 3a Unobserved common cycle component and BTS indicators.
DE
20 10 0 -10 -20 -30 -40 -50 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 15 10 5 0 -10 -5 -20 -10 -15 -20 -30 -40 -50 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 -10 -15 -20 -25 -5 30 20 10 0

DE
15 10 5 0

DE_ICI_SA

DE_IPICI_CYCLE

DE_IPE_SA

DE_IPIPE_CYCLE

DE
30 20 10 0 -10 -20 -30 -40 -50 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 12 8 4 0 -10 -4 -20 -8 -12 -16 -20 -30 -40 -50 1992 1994 1996 1998 2000 20 10 0

FR
12 8 4 0 -4 -8 -12 -16 2002 2004 2006 2008 2010

DE_IPT_SA

DE_IPIPT_CYCLE

FR_ICI_SA

FR_IPICI_CYCLE

FR
30 20 10 0 -10 -20 -30 -40 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 12 8 4 10 0 -4 -8 -30 -12 -16 -40 -50 1992 1994 1996 1998 2000 0 -10 -20 40 30 20

FR
20 15 10 5 0 -5 -10 -15 -20 -25 2002 2004 2006 2008 2010

FR_IPE_SA

FR_IPIPE_CYCLE

FR_IPT_SA

FR_IPIPT_CYCLE

Source: Own calculations.

15

Unobserved component model with observed cycle

Figure 3b

Unobserved common cycle component and BTS indicators.

IT IT
12 40 30 20 12 8 4 0 -4 -8 -12 -16 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

20

10

4 10

-10

0 0

-20

-4 -10

-30

-8

-20 -30

-40 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-12

IT_ICI_SA

IT_IPICI_CYCLE

IT_IPE_SA

IT_IPIPE_CYCLE

IT
20 10 0 -10 -20 -30 -40 -50 -60 -70 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20 15 10 5 0 0 -5 -10 -15 -20 -25 -10 -20 -30 -40 1992 1994 1996 1998 2000 40 30 20 10

PL
6 4 2 0 -2 -4 -6 -8 -10 2002 2004 2006 2008 2010

IT_IPT_SA

IT_IPIPT_CYCLE

PL_ICI_SA

PL_IPICI_CYCLE

PL
40 30 20 10 0 -10 -20 -30 -40 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 7.5 5.0 2.5 0.0 0 -2.5 -10 -5.0 -7.5 -10.0 -12.5 -20 -30 -40 1992 1994 1996 1998 2000 30 20 10

PL
16 12 8 4 0 -4 -8 -12 2002 2004 2006 2008 2010

PL_IPE_SA

PL_IPIPE_CYCLE

PL_IPT_SA

PL_IPIPT_CYCLE

Source: Own calculations.

16

Unobserved component model with observed cycle

Figure 3c

Unobserved common cycle component and BTS indicators.

UK UK
12 8 4 0 0 -5 -10 -15 -20 -25 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 -4 -20 -8 -12 -16 -20 -40 -60 -80 60 40 20 10 5 0

20 10 0 -10 -20 -30 -40 -50 -60 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

UK_ICI_SA

UK_IPICI_CYCLE

UK_IPE_SA

UK_IPIPE_CYCLE

UK
60 10

40

20

-5

-20

-10

-40

-15

-60 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-20

UK_IPT_SA

UK_IPIPT_CYCLE

Source: Own calculations.

17