Courtesy of Doug Short
Note from dshort: The Philly Fed ADS Business Conditions Index has been updated today to include relevant data available through January 31.
The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is one of my favorite indicators. Named for the three economists who devised it, the index, as described on its home page, “is designed to track real business conditions at high frequency.” It is based on six underlying data series:
- Weekly initial jobless claims
- Monthly payroll employment
- Industrial production
- Personal income less transfer payments
- Manufacturing and trade sales
- Quarterly real GDP
The accompanying commentary goes on to explain that “The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.”
Here’s a chart of the index based on daily values from a start date of March 1960 with recessions highlighted.
For the sake of legibility and to facilitate comparison with other indicators, I prefer a 91-day moving average of the index.
Now let’s compare the Philly Fed’s Business Conditions Index with the Chicago Fed’s National Activity Index (CFNAI), which reaches back to March 1967. (See also my latest monthly update for the CFNAI here.) The CFNAI is based on 85 economic indicators from four categories:
- Production and income
- Employment, unemployment and hours worked
- Personal consumption and housing
- Sales, orders and inventories
First a stand-alone snapshot of the Chicago Fed’s index.
Now let’s overlay the two indexes.
Even the most cursory examination shows the virtually identical correspondence of these two indicators to the general economy. Moreover, the recession overlay also confirms their accuracy in real-time calls on major economic downturns of the last few decades as determined a year or more after the fact by the NBER.
The next chart reveals a trend that both charts illustrate — one that might not be obvious at first glance. Let’s let Excel draw linear regressions through both data series. Does this tell us something about the general direction of the post-industrial economy of the United States?
