A Monthly Indicator of the French Business Climate

In France, the business tendency surveys conducted in all the important sectors of the economy are key components in diagnosing the economic outlook. Over the years, INSEE has gradually introduced business climate indicators for each business sector. Such indicators summarise the data contained in the many balances of opinion supplied by the surveys and enable to measure the economic situation each month. An indicator of this kind has been lacking, however, for the economy as the whole. To fill this gap and enrich the existing panel of business climate indicators we provide in this paper the first composite indicator based on French business surveys covering all the important economic sectors of the French economy. We chose the dynamic factor analysis to deal with mixed and changing frequencies and time availability of the data. Parameters are estimated by maximum likelihood based on the Kalman filter. Several indicators can be estimated according to the type (sector-based business climate indicators or elementary components) and the number of variables included in the model. To validate our results and choose the best indicator, we defined three criteria : real-time stability, predictive accuracy to forecast GDP growth and ability to reproduce French business cycles. The new monthly synthetic indicator which passed the tests best allows a clear and simple interpretation of all the business surveys and can deliver each month an early and accurate quantitative message concerning the current business climate in France. This indicator can also be used to improve GDP growth forecast.