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The Philly Fed ADS Business Conditions Index

  • Written by Syndicated Publisher No Comments Comments
    April 17, 2015

    The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively 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 (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.”

    The index 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.

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    Now let’s take a closer look at the 21st century daily index. I’ve added a pair of dashed parallel lines highlighting a high-low channel since 2010. My purpose was to give a better sense of direction for the economy. The top dashed line marks the post-recession peaks. The bottom line is parallel to it and positioned at the early 2013 low.

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    A Smoothed Look at the ADS Index and Recessions

    The chart below features a 91-day moving average of this daily index. Why 91 days? The better know cousin index of the Philly Fed’s ADS the Chicago Fed’s National Activity Index. 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.

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    Click for a larger image

    As we can see, the current level of this index is lower than it was at the onset of five of the seven recessions during this timeframe.
    A Comparison with the Chicago Fed’s National Activity 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

    For a close look at the four components, see this monthly update.

    Here is the afore-mentioned CFNAI-MA3.

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    Even the most cursory examination shows the reasonably close correlation of these two indicators of the general economy. Moreover, the recession overlays for both also confirm their general accuracy in illustrating major economic downturns over the last few decades. Of course, these aren’t real-time calls, because both are subject to rather extensive revisions.

    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.

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    Compare the slope of the regression with its counterpart in the CFNAI-MA3.

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    This chart duo indeed tells us something about the long-term trend toward slowing growth in post-industrial economy of the United States. In fact, we see a similar trend in real GDP. Note the dashed red line in the chart below:

    Click to View
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    I’ll continue to post periodic updates of this overview of the Philly Fed ADS Index.

    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 article attests.
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