What it means
A leading indicator is a measure that tends to move before the wider economy does. Instead of waiting for official growth figures, which arrive late, businesses and policymakers use such indicators to get an early read on conditions.
The KOF Barometer is a leading indicator for Switzerland. It is built from many underlying components, drawn from areas such as manufacturing, construction, retail, banking, foreign demand and consumer sentiment.
A statistical method selects and combines the parts that best signal future economic activity. The final figure is published each month and is scaled so that its long-run average is 100.
Readers focus on the direction and size of the move. A rise from 98 to 103 suggests that momentum is improving, while a fall from 105 to 99 suggests that it is fading.
Because the series is built to anticipate growth rather than describe the past, it can turn before official data does. For a finance manager, the barometer can feed into planning and forecasting.
A company with Swiss customers might compare the reading with its order book to judge whether demand is likely to strengthen. Investors and economists also watch it, as it can influence views on interest rates and the Swiss franc.
Like all leading indicators, it is imperfect. It can give false signals, it is revised when new data arrive, and it reflects sentiment as well as hard facts.
It is best used alongside other indicators such as purchasing manager surveys, order data and official statistics. Because other countries have similar indicators, such as business confidence surveys, it is useful to understand the idea behind the series.
Each indicator has its own construction, so readings are not directly comparable between countries. When quoting a level, always give the release date and the source.
In practice
Real-world examples.
Example
A Swiss machinery exporter reviews its budget in the autumn. The barometer has risen for three months and moved above 100, which supports the sales team's forecast of higher orders. The finance director raises the production plan slightly but keeps hiring cautious.
Example
A currency analyst writes a note on the Swiss franc. A strong reading suggests the economy is resilient, which she links to the central bank's policy stance. She cautions that the reading is only one input among many.
Example
A lender assessing a Swiss retail group checks the barometer as part of its sector review. The reading has fallen below 100 for several months, so the bank applies a more cautious view of forecast sales. It asks the borrower for a sensitivity analysis showing how profit and debt cover would look if sales fell by 5% or 10%.
Case study
Seen in the real world.
Alpine Timber is an illustrative, fictional company supplying building materials in Switzerland. Its finance manager noticed that the barometer had slipped from 104 to 97 over four months, even though the order book still looked healthy.
She modelled a scenario in which orders fell by 10% over the next two quarters, which would reduce annual revenue of $30,000,000 by $3,000,000. She then arranged a larger credit line and delayed a planned $500,000 equipment purchase.
Orders did soften later in the year, and the company was able to ride out the dip without a cash squeeze. The illustrative lesson was that an early warning signal gave time to prepare, even though it could not say exactly how large the slowdown would be. The finance manager now adds the barometer to her monthly report, next to the order book and cash forecast, and she records what action each reading triggered so that the team can judge how useful the signal has been.
Watch out
Common mistakes.
- Treating the barometer as a forecast of any particular company's sales, when it describes the overall economy.
- Reading too much into one month, when trends over several months are more informative.
- Comparing its level directly with indicators from other countries, when each series is built differently.
Questions
People also ask.
What does a reading of 100 mean?
It is the long-run average of the series, so values above 100 point to above-average growth and values below point to below-average growth.
Who produces the barometer?
It is produced by the KOF Swiss Economic Institute, a research institute at ETH Zurich.
How far ahead does it look?
It is designed as a leading indicator that signals the direction of the Swiss economy over the next few months, though it does not give an exact date or size for any turn. Sales teams can use it as a simple talking point when they explain to customers why conditions may be changing.
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