The Philly Fed ADS Business Conditions Index

Note from dshort: In response to a reader's request, I've updated my chart series on the Philly Fed's ADS index.

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 index based on data inputs since 2000.
For a longer-term perspective here is a 91-day moving average of this daily index since March 1960, the date of the earliest data.

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

To facilitate comparison of the 91-day moving average of the ADS index, I've created a 3-month moving average of the Chicago Fed index.

Now let's overlay the two.

Even the most cursory examination shows the extremely close correlation of these two indicators of 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 in both indicators — 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 post-industrial economy of the United States? Here is a snapshot of the ADS index and real GDP over the same time frame, both with linear regressions.

The GDP series clearly confirms the long-term trend toward slower growth in the U.S. economy suggested by the two Fed indicators.