KOF Economic Barometer

What it is

The KOF Economic Barometer is a Swiss leading economic indicator produced by the KOF Swiss Economic Institute (ETH Zurich). It is designed to signal turning points in the Swiss business cycle and to benchmark short-term trends, including employment and GDP growth momentum.

Key takeaways

• Introduced in the 1970s and revised several times; current methodology dates from 2014.
• Aggregates hundreds of monthly indicators (over 300 selected from a broader pool).
• Typically leads the reference series for Swiss GDP growth by about one month.
• Widely followed by investors and market participants; surprising readings can influence the Swiss franc.

How it works

The Barometer has a multi-sector design with three broad modules: core (GDP-related activity), construction, and banking. Its objective is to provide an early monthly signal of changes in the Swiss business cycle by tracking co-movements across many variables.

Data selection
* A large pool (500+) of candidate monthly variables is screened each year.
Candidates are chosen based on theoretical relevance to the Swiss economy and an empirically established leading relationship with a reference series that approximates monthly Swiss GDP growth (interpolated from quarterly data).
The mix of selected variables changes over time according to standardized statistical criteria; currently more than 300 variables enter the composite.

Aggregation and calculation
1. Selected variables are standardized and combined using principal component analysis (PCA).
2. The first principal component—capturing the common co-movement across variables—is extracted to produce the Barometer reading.
This approach emphasizes stability and robustness by drawing information from many series rather than relying on a small set of indicators.

Interpretation and uses

• The Barometer is interpreted as a leading signal of cyclical direction rather than a precise measure of GDP level.
• A rising Barometer suggests accelerating economic activity; a falling Barometer indicates slowing activity.
• Financial market participants use it to inform positioning on Swiss assets; unexpectedly strong readings can appreciate the Swiss franc, while weak readings can have the opposite effect.

Limitations

• It does not provide a direct estimate of the absolute level of GDP growth—only directional information and cyclical timing.
• As with any composite indicator, revisions to component series or structural changes in the economy can affect its reliability; regular methodological updates aim to mitigate this.

History and methodological evolution

• Published since the 1970s by the KOF Swiss Economic Institute.
• Methodology underwent major updates in 1998 and 2006; the most recent comprehensive revision was in 2014.
• Earlier versions used a much smaller set of variables (6–25); the current approach deliberately uses several hundred series to increase stability, transparency, and resistance to frequent revision.

Conclusion

The KOF Economic Barometer is a robust, PCA-based composite designed to provide early monthly signals of Switzerland’s business-cycle dynamics. It is most valuable as a short-term directional indicator for analysts, policymakers, and market participants, while its design and large component set aim to enhance stability and reduce susceptibility to noise.