Manufacturing cycle prediction using structural equation model toward industrial early warning system simulation: The Indonesian case

This study aims to integrate short-term, medium-term, and long-term Composite Leading Indices (CLIs) to establish that interconnected CLIs offer enhanced predictive capabilities compared to individual CLIs. Specifically, it investigates the relationships among CLIs to forecast Indonesia's Manufacturing Cycle (ManC) using Partial Least Squares-Structural Equation Modeling (PLS-SEM). Building on an extensive literature review, the study employs quarterly data spanning from Q1 2010 to Q2 2022, incorporating five constructs representing key economic sectors influencing the manufacturing cycle. The analysis includes two short-term CLIs: the Short Leading Economic Index (SLEI) and the International Trade Channel (ITC). The SLEI is composed of two indicators, the Manufacturing Purchasing Managers’ Index (PMI) and the Composite Stock Price Index from the Indonesia Stock Exchange, while the ITC comprises nine critical export-import CLIs. The Fiscal Cycle (FC) is a potential medium-term CLI, including Gross Domestic Product (GDP) per capita, manufacturing investment, oil prices, and the Consumer Price Index (CPI). Meanwhile, the monetary cycle (MC) comprises the Policy Interest and Real Effective Exchange Rates. This research effectively supports the application of PLS-SEM in forecasting the ManC in Indonesia.