Rate-Of-Change Analysis

The graphs you'll find in the Outside The Box! newsletter are 12-month rate-of-change charts (also known as 12/12 curves or pressure curves). Each point on a 12/12-curve is calculated by adding the data from the twelve most recent months and dividing that sum by the comparable 12-month total from a year earlier. To complete the calculation, you multiply this answer by 100 and then subtract 100. This gives you a 12-month growth rate expressed as a percentage of the prior twelve months.

So, the 12/12 value from December will give you the annual percent change for that calendar year. Percent changes for fiscal years not ending in December are the 12/12 value for the last month of the fiscal year. A 12/12 curve is generated when this calculation is done for every month of the year and the results are plotted on a graph.

A 3/12 (three-twelve rate-of-change) can be calculated exactly the same way as a 12/12 except that the periods used are three months instead of twelve months. To derive a 3/12 value, divide the total activity from the past three months by the total from the same three months of a year ago. You then multiply by 100 and subtract 100 to get the answer expressed in percentage terms. The 3/12 values from March, June, September, and December are familiar to everyone as quarterly percent changes from the previous year.

A 1/12 (one-twelve rate-of-change) is the current month's data divided by the data from the same month a year earlier. This calculation is commonly used in business, as when somebody says, "This October's sales figures are 10% higher than they were last October." Graphing these percent changes every month can generate a 1/12 chart.

So a market's momentum or rate of growth is what one reads on a rate-of-change chart, not the actual levels of activity.

Any point on a 12/12 rate-of-change curve above the "zero-line," whether the curve is rising or falling, indicates that activity during the past twelve months increased when compared to the same twelve months of a year earlier. The highest point on a 12/12 curve represents the time when a market's or company's growth rate was the highest, not when actual activity was the highest.

Any point on a 12/12 rate-of-change curve below the "zero-line," whether the curve is rising or falling, indicates that activity during the past twelve months decreased when compared to the same twelve months of a year earlier. The lowest point on a 12/12 curve represents the time when the market or company data was receding at its fastest rate (the growth rate was the lowest). Again, this is not the point when actual business levels were at their lowest.

The 12/12 rate-of-change analysis offers several advantages to the forecaster, manager, or business analyst. First of all, it clearly identifies cyclical patterns in the data. Raw data often contains volatility from month to month that makes analysis difficult. 12/12 curves are much smoother and less affected by periodic anomalies in the data. Also, with this method of analysis there is no need to make any seasonal adjustments to the data. The calculations for all data points already contain all four seasons in both the numerator and the denominator.

Another advantage is that data from different markets or indicators can be directly compared. It is often difficult to compare trends in data that is expressed in different units (such as dollars, units, indices, percentages, pounds, feet, etc.). Such comparisons are easier with rate of change curves because they measure the same concept, the momentum of change in the market.

Figure 1. This is a magnificent example of the rate of change correlation between a leading indicator (housing starts) and the market for extruded products (represented here by our Extrusion Business Index).

The lead/lag relationship between markets is easily discerned by comparing the 12/12 curves of such markets. In our example above (see Figure 1), there is a three to six month lag between changes in the housing starts data and changes in sales of extrusion resins. Similarly, there is a three to six month lag between changes in resins consumption and changes in new orders for many types of plastics machinery.

Changes in market share are also easily readable from 12/12 curves. When a 12/12 graph of a company's data is compared to the 12/12 graph from the industry's data, any gaps between the curves indicate a shift in market share. If a company's curve is consistently above the industry curve, then it is gaining market share because it is growing at a faster rate than the industry. Conversely, if a company's curve is below the industry curve, then it is losing market share because it is growing more slowly than the industry.

A rate-of-change curve that persistently stays above the "zero-line" throughout its cycle indicates a growth industry or company. A curve that spends more time below the "zero-line" during its cycle than above is indicative of a product, company, or industry that is in a long-term decline.

Rate-of-change curves that are very volatile, very high in the highs and very low in the lows, typify markets that are new or are relatively small or are comprised of very expensive products (i.e. orders for capital equipment). Curves that exhibit low volatility are evidence that the product or industry measured is stable, mature, or made up primarily of many inexpensive goods (i.e., sales at grocery stores).

Though rate-of-change charts may at first seem a little confusing, one's ability to interpret them improves dramatically with a little practice. Once they are mastered, rate-of-change charts are a very powerful analytical tool. And any spreadsheet program can easily perform the calculations.

Contact us if you need more help interpreting our rate-of-change charts. Our objective is to make our market data as accessible and useful as possible. Good luck, and may all of the forecasts for your products end up on the low side!

--Bill Wood, Plastics Market Economist
Mountaintop Economics & Research, Inc.