Transportation Indicators and Business Cycles.Business Economics (2011) 46, 260-261.
Transportation Indicators and Business Cycles by Kajal Lahiri is an interesting book at three levels. First, the book is a study of the economics of the transportation sector. Second, the book is an exercise in the study of business cycles and leading indicators. Finally; the book is an application of time-series analysis to economic data. On all three levels, I found the book a worthwhile read and useful to applied economists who may wish to better understand the transportation sector as well as build up their tool box.
The focus of the first section of the book is on the development of a Transportation Services Index (TSI), which covers six modes of transportation services. The construction of the index is a useful lesson for other researchers in its methodology. The weights for the six individual components reflect their value-added weights in the NIPA--not output. The component series are aggregated using the Fisher-ideal quantity index. The author then completes his analysis by comparing transportation to the NBER-de-fined growth cycles and finds that transportation leads at both peaks and troughs. The approach of building an index and comparing that index to business cycles is a useful exercise for anyone wishing to identify an aggregate index for any sector and comparing that to the business cycle.
The second section is a study in the importance of transportation indicators in monitoring cyclical movements in the aggregate economy. The author develops a composite of the TSI and indicators for employment, payroll, and personal consumption in the transportation sector. He finds a lead/lag relationship at peaks and troughs, respectively. This section is a useful exposition of the indicator approach to identifying growth and business cycles and its application to a particular industry.
The book goes on to identify the characteristics of leading indicators of the transportation sector and the role of the TSI as a coincident indicator. The application of time-series analysis and filters is a very useful exercise for practitioners.
So what is there for us to learn? First, the book focuses on the challenge we all face on identifying indicators of performance of our industry. While the book focuses on the transportation sector, there are echoes for every sector. How do we measure output--especially in a sector, such as transportation, where the character of the output may differ, as in passenger and freight traffic? In banking, for example, how might output measures differ among such services as community banking, wealth management, and investment banking? A second challenge is how to aggregate the output measure across sectors. Often, senior management thinks in terms of profits; and yet, as economists, we are looking at output and prices. Third, once we have our measure of output, how might we relate the behavior in our sector to that of the overall economy? In this section, the author focuses on growth cycles, the alternating periods of decelerations and accelerations of growth. This is a very useful breakdown that we actually use in our own work at Wells Fargo and that we find far more useful than the either/or option of expansion or recession. In this vein, we use the Hodrick-Prescott filter approach to provide an initial impression of the behavior of a series relative to its trend. Other filters and approaches are available, of course. I published discussions of some of them in Business Economics, and they are useful in many applications.
Finally, the author pursues the goal of developing a set of leading indicators for the transportation sector--once again a very useful activity for those of us in other areas of the economy. As one might suspect, the transportation sector is very sensitive to changes in interest rates (given the financing of large capital goods used in transportation) as well as the price of oil (used in the variable costs of the transportation sector). The author's use of Granger causality tests is a bonus for those not familiar with that technique. Then he pursues six selection criteria for leading indicators and then employs an index of concordance approach. This whole process is a useful approach, no matter what sector of the economy a researcher wishes to study.
This book is a useful, readable, exposition of the analysis of a particular sector of the economy that offers the opportunity to be applied to many other sectors. Thus, I would recommend it to any practicing analyst who wishes to better understand the cyclical patterns of his or her industry and to develop a series of leading and coincident indicators for its respective sectors.
By Kajal Lahiri. 2010. Emerald Group Publishing Limited. Pp. 210. $114.95 hardcover.
John E. Silvia Managing Director and Chief Economist, Wells Fargo