Alternative Measures of Economic Activity Jan J. J. Groen, Officer Research and Statistics Group High School Fed Challenge Student Orientation: February 1 and 2, 217
Outline Alternative indicators: data beyond those used in GDP estimation Industrial production: most prominent and oldest Surveys of business activity Specific sectoral data Consumer indicators Cyclical indicators Labor market conditions indexes Financial indicators Financial conditions indexes 2
Reasons to follow such indicators These indicators have different characteristics: Coincident Indicators: Information about the state of the economy NOW (= current quarter). Higher publication frequency (monthly, weekly, daily) provides advantage over the quarterly GDP frequency. Leading Indicators: Information about the state of the economy in the NEAR FUTURE (= beyond the current quarter) 3
Reasons to follow such indicators GDP estimate takes time and is subject to revisions Financial markets cannot wait Many times, policymakers also cannot wait A cross check to GDP estimates and judgmental assessments Concern about specific sectors For their own rights For information about aggregate economic dynamics: GDP = C + I + G + X - M Examine nonstandard interactions, particularly between financial markets and real economy 4
Industrial production Oldest measure of economic activity begins in 1921 Available monthly Three main sectors: manufacturing, utilities, mining Industrial sector s share of GDP has shrunk over time, but Comprises highly cyclical components of the economy Accounts for sizable share of cyclical volatility Link between industrial production and GDP growth Capacity utilization: measures how much producers utilize their production capacity (machines and workers) Link between capacity utilization and inflation 5
Manufacturing Industrial Production % Change 12 month % Change 12 month 15 15 1 1 5 5-5 -5-1 -1-15 -15-2 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-2 Source: Federal Reserve Board Note: Shading represents NBER recessions.
Capacity Utilization vs. PPI Inflation Percent of Capacity, Manufacturing 88 Capacity Utilization: Manufacturing 86 (left axis) 84 82 8 78 76 74 72 12-month Percentage Change 12 1 8 6 4 2 7 68 66 64 PPI: Finished Goods (right axis) -2-4 -6 62 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-8 Sources: Federal Reserve Board, Bureau of Labor Statistics Note: Shading represents NBER recessions.
Business activity surveys Two traditional sources in the U.S. Institute for Supply Management (ISM) Various Federal Reserve Banks Questions about whether aspects of business (e.g. orders) are better, worse, or unchanged; produce diffusion indexes Headline index ISM: composite index of various specific indexes Regional Fed surveys: based on separate question about assessment of general business conditions Available within or just after the reference month Employment indexes helpful to assess labor market conditions Prices paid indexes provide information on cost pressures 8
ISM Composite Indexes Index, 5+ = Expanding Activity 75 Index, 5+ = Expanding Activity 75 65 Manufacturing: PMI Composite Index Nonmanufacturing: NMI Composite Index 65 55 55 45 45 35 35 25 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 25 Source: Institute for Supply Management Note: Shading represents NBER recessions.
Empire State and Philadelphia Fed Indexes Diffusion Index, % Balance 5 Diffusion Index, % Balance 5 4 3 2 1-1 -2-3 Empire State 4 3 2 1-1 -2-3 -4-5 Philadelphia Fed -4-5 -6 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-6 Sources: Federal Reserve Bank of New York, Federal Reserve Bank of Philadelphia Note: Shading represents NBER recessions.
Business activity surveys (continued) Small business activity National Federation of Independent Business (NFIB) Small Business Optimism Index Small business typically thought important for job creation Index has recovered from recent recession but remains below pre-great Recession levels. 11
13 Small Business Optimism Index Index,1986=1 11 Index,1986=1 11 15 15 1 1 95 95 9 9 85 85 8 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 8 Source: National Federation of Independent Business Note: Shading represents NBER recessions.
Sectoral indicators Large variety of such indicators concentrate on two sectors Housing market Nonresidential construction Housing market indicators NAHB Housing Market Index: stabilization of momentum in recent months Home price indexes: higher pace of increases in past few months Nonresidential construction Architectural billings index: leading indicator for sector Recent readings show growth moderation 13
Housing Market Index Index, 5 = equal number of good and poor 8 Index, 5 = equal number of good and poor 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Source: National Association of Home Builders Note: Shading represents NBER recessions.
CoreLogic National Home Price Index % Change 12 month % Change 12 month 2 2 15 15 1 1 5 5-5 -5-1 -1-15 -15-2 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-2 Source: CoreLogic Note: Shading represents NBER recessions. * Includes distressed sales.
Architectural Billings Index Index, 5+ = Increasing Billings 65 Index, 5+ = Increasing Billings 65 6 6 55 55 5 5 45 45 4 4 35 35 3 1996 1998 2 22 24 26 28 21 212 214 216 3 Source: American Institute of Architects Note: Shading represents NBER recessions.
Consumer indexes consumer confidence Three major consumer confidence surveys: questions about personal finances, assessment of economy, expectations of finances and economy, etc. Reuters/Michigan (released twice per month) Conference Board (released monthly) Bloomberg Consumer Comfort (released weekly) Timely read on consumer sentiment May provide some early indication of economic conditions Some benefit in forecasting consumer spending Early indication of changes in consumption fundamentals Employment/unemployment questions helpful in assessing labor market conditions 17
Consumer Confidence/Sentiment Indices Source: University of Michigan, Bloomberg, and the Conference Board Note: Shading represents NBER recessions. Index 8 Conference Board Consumer Confidence Index (Right Axis) Index 15 13 6 11 4 2 Michigan Consumer Sentiment Index (Right Axis) Bloomberg Consumer Comfort Index (Left Axis) 9 7 5 3 1986 199 1994 1998 22 26 21 214 1
FRBNY Survey of Consumer Expectations (SCE) Designed to elicit consumer expectations for a range of economic and financial conditions Broader scope than traditional consumer surveys Attempt to capture beliefs more fully Likelihood of outcomes Uncertainty around point predictions Enhance understanding of expectations formation Internet-based survey of rotating panel of 12 households Conducted for FRBNY by Demand Institute Two components Monthly core module Inflation, home prices, labor market conditions, finances Quarterly modules: special topics 19
13 3 Year Household Inflation Expectations from SCE Percent 8 Percent 8 7 6 75th Percentile 7 6 5 5 4 3 Median 4 3 2 25th Percentile 2 1 1 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Source: FRBNY/Survey of Consumer Expectations Note: Shading represents NBER recessions.
13 1 Year Household Income Growth Expectations Percent 7 6 75th Percentile Percent 7 6 5 5 4 3 Median 4 3 2 1 25th Percentile 2 1-1 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16-1 Source: FRBNY/Survey of Consumer Expectations Note: Shading represents NBER recessions.
Cyclical indicator indexes Statistical combinations of other economic indicators Three examples Conference Board: leading, coincident, and lagging indexes of economic indicators Forecast/verify expansions and contractions in real GDP Each uses a fairly small number of indicators Mixed performance FRB of Chicago National Activity Index Uses Stock-Watson (1999) methodology: 85 indicators Arouba-Diebold-Scotti (ADS) Business Conditions Index Based on ADS (29). Weekly frequency, combines six (including GDP) indicators. Published/maintained by FRB of Philadelphia. Provides a check to our judgmental assessment of conditions 22
Conference Board Leading Indicator Index % Change 12 months % Change 12 months 15 15 1 1 5 5-5 -5-1 -1-15 -15-2 -2-25 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-25 Source: The Conference Board Note: Shading represents NBER recessions.
Conference Board Coincident Indicator Index % Change 12 months % Change 12 months 1 1 8 6 4 2-2 -4-6 -8-1 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 8 6 4 2-2 -4-6 -8-1 Source: The Conference Board Note: Shading represents NBER recessions.
Chicago Fed National Activity Index: 3 Month Average Index, Trend Growth = Index, Trend Growth = 2 2 1 1-1 -1-2 -2-3 -3-4 -4-5 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-5 Source: Federal Reserve Bank of Chicago Note: Shading represents NBER recessions.
Arouba-Diebold-Scotti Business Conditions Index Index, Historical Average = Index, Historical Average = 2 2 1 1-1 -1-2 -2-3 -3-4 -4-5 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-5 Source: Federal Reserve Bank of Philadelphia Note: Shading represents NBER recessions.
Labor market conditions indexes Statistical combinations of various labor market indicators Two examples Board of Governors 19 indicators Kansas City Fed 24 indicators 2 indexes: level of activity and labor market momentum Marginal benefit in assessing labor market beyond the usual major indicators (particularly the unemployment rate) Importance of indicators may vary over business cycle, which is not well captured in these indexes A check regarding judgmental assessment of labor market conditions 27
13 Federal Reserve Board Labor Market Conditions Index Index Change Index Change 2 2 16 16 12 12 8 8 4 4-4 -4-8 -8-12 -12-16 -16-2 -2-24 -24-28 -28-32 -32-36 -36-4 -4-44 -44 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 Source: Federal Reserve Board Note: Shading represents NBER recessions.
13 Kansas City Fed Labor Market Conditions Indicators Index, = Long Term Average 2 Index, = Long Term Average 2 1 Activity 1-1 -2 Momentum -1-2 -3-3 -4-4 -5 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-5 Source: Federal Reserve Bank of Kansas City Note: Shading represents NBER recessions.
Financial indicators Because of the financial crisis and recession, greater attention on financial conditions and their influence on economy Asset prices, interest rates, and spreads Also interest in financial quantity variables Two traditional sources from Federal Reserve Board Flow of Funds Consumer credit FRBNY releases information on household credit conditions Data come from FRBNY Consumer Credit Panel/Equifax Debt levels, delinquency rates, etc. More detail across households than traditional sources 3
13 Households: Liabilities to Financial Assets Ratio Ratio.36 Ratio.36.34.34.32.32.3.3.28.28.26.26.24.24.22.22.2.2.18 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216.18 Source: Federal Reserve Board Note: Shading represents NBER recessions.
Growth of Consumer Credit 12-month Percentage Change 19 12-month Percentage Change 19 14 14 9 9 4 4-1 -1-6 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216-6 Source: Federal Reserve Board Note: Shading represents NBER recessions.
13 Seriously Delinquent Loans to Households % Balance 9+ days Delinquent 1. % Balance 9+ days Delinquent 1. 8. 8. 6. 6. 4. 4. All Loans 2. Mortgages 2... 1999 21 23 25 27 29 211 213 215 217 Source: Federal Reserve Bank of New York Note: Shading represents NBER recessions.
13 Student Loans to Total Debt Ratio Ratio.15 Ratio.15.12.12.9.9.6.6.3.3. 23 24 25 26 27 28 29 21 211 212 213 214 215 216. Source: FRBNY Consumer Credit Panel Note: Shading represents NBER recessions.
Financial conditions indexes A number have been developed in recent years Attempt to gauge impact of financial factors, Fed policy, and possibly other factors on the real economy Most use only financial market prices Provided some useful signals in the prelude to the recent crisis However, qualifications remain Less useful signals in some previous cases Omitted variables (e.g. home and energy prices) Limited out-of-sample analysis 35
13 Financial Conditions Indexes Index 2. Index 2. 1. FRBKC 1... -1. -1. -2. -2. -3. Bloomberg FC+ Bloomberg FC -3. -4. -4. -5. -5. -6. Tighter Conditions -6. -7. -7. -8. -8. -9. -9. -1. -1. 1999 21 23 25 27 29 211 213 215 217 Sources: Federal Reserve Bank of Kansas City, Bloomberg Note: Shading represents NBER recessions.
Conclusions Large number of alternative economic indicators! Number has grown over recent years Technology more information that non-government agencies can compile Important to know state of economy in a timely manner These indicators are useful along some dimensions More information about state of economy Now and going forward Recent trend: feed indicators into large scale statistical models for judgment-free GDP estimates and predictions. Do not replace judgmental assessment of economic conditions Economy can change faster than the indicators can adapt 37