The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed’s National Activity Index, which is updated monthly (more about the comparison below).
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.”
The first chart shows the complete data series, which stretches back to 1960. I’ve highlighted recessions and the current level of this daily index through its latest data point.
To facilitate comparison with the Chicago Fed’s National Activity Index (CFNAI), I’ve created a 91-day moving average of this daily index. Why 91 days? The CFNAI is updated monthly, but the metric that gets the most attention by the Chicago Fed economists is its three-month moving average. They’ve even coined an acronym for it, the CFNAI-MA3. Thus I’ve used 91 days as a comparable smoothing of the Philly Fed ADS index. In the ADS 91-day MMA chart below I’ve highlighted recessions and the value of the smoothed index at recession starts.
As we can readily see, the current level of this index is higher than it was at the onset of all recessions with the exception of the one in 1973-1975 that was triggered by the Arab Oil Embargo and subsequent gasoline shortages.
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 CFNAIhere.) 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
For a close look at the four components, see this monthly update.
Here is the afore-mentioned CFNAI-MA3.
Even the most cursory examination shows the close correlation of these two indicators of the general economy. Moreover, the recession overlays for both also confirm their general accuracy in real-time calls on major economic downturns over the last few decades.
The next chart reveals a trend in the ADS index — one that might not be obvious at first glance. Let’s let Excel draw linear regressions through the data series.
Compare the slope of the regression with its counterpart in the CFNAI-MA3.
This chart duo indeed tells us something about the long-term trend toward slowing growth in post-industrial economy of the United States.
Images: Flickr (licence attribution)
About The Author
My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.
My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.
Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.
Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool