The Aruoba-Diebold-Scotti Business Conditions Index ("ADS Index" ) is a coincident

business cycle Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...

indicator Indicator may refer to: Biology * Environmental indicator of environmental health (pressures, conditions and responses) * Ecological indicator of ecosystem health (ecological processes) * Health indicator, which is used to describe the health o ...

used in

macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

in the United States. The index measures business activity, which may be correlated with periods of expansion and contraction in the

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

. The primary and novel function of the ADS index stems from its use of high-frequency economic data and subsequent high-frequency updating, opposed to the traditionally highly-lagged and infrequently-published macroeconomic data such as

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

Development

The ADS index was first introduced by the authors, including Francis Diebold, in March 2007 and published in October 2008, but the index is retroactively calculated back to March 1960. While other economic nowcasting often estimates GDP or

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

, the ADS index exists as an stand-alone series. This is in part due to the business cycle not tied to a single variable, such as GDP, employment, or

industrial production Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product (GDP), the ...

. Instead, business cycle theory suggests an underlying

factor Factor, a Latin word meaning "who/which acts", may refer to: Commerce * Factor (agent), a person who acts for, notably a mercantile and colonial agent * Factor (Scotland), a person or firm managing a Scottish estate * Factors of production, suc ...

that moves each of these series. The ADS index estimates that unobserved factor. The index itself is the principal factor produced by a dynamic factor model. As standard for such models, it is cast in

state space A state space is the set of all possible configurations of a system. It is a useful abstraction for reasoning about the behavior of a given system and is widely used in the fields of artificial intelligence and game theory. For instance, the toy ...

and estimated using

maximum likelihood estimation In statistics, maximum likelihood estimation (MLE) is a method of estimating the parameters of an assumed probability distribution, given some observed data. This is achieved by maximizing a likelihood function so that, under the assumed statis ...

methods. A

Kalman filter For statistics and control theory, Kalman filtering, also known as linear quadratic estimation (LQE), is an algorithm that uses a series of measurements observed over time, including statistical noise and other inaccuracies, and produces estimat ...

handles the missing data that arises from using a mix of frequencies of input data. For example, a daily series such as term premium sets the entire model to be daily. Unemployment data is collected monthly, though, so all days between releases are treated as missing data. The factor deals with the de-meaned growth rate of business activity, such that it is (a) centered on 0, and (b) measures deviation from average growth. Thus, a ADS score of 0 indicates completely average growth, positive values indicate greater than average, and negative less than average.

Data

The ADS initially used just four input series to estimate the unobserved factor: GDP, Employment, Initial Claims, and Slope (of faily term structure). However, removing this last term yielded no loss in model accuracy. This demonstrates that more is not always better. The weekly initial claims in unemployment was helpful, though. Currently, the ADS relies on the following data: * Initial jobless claims (weekly) * Payroll employment (monthly) *

Industrial production Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product (GDP), the ...

(monthly) * Real personal income, less

transfer payment In macroeconomics and finance, a transfer payment (also called a government transfer or simply transfer) is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. Th ...

s (monthly) * Real manufacturing and trade sales (monthly) * Real

(monthly)

Usage

The ADS is currently maintained by the

Federal Reserve Bank of Philadelphia The Federal Reserve Bank of Philadelphia — also known as the Philadelphia Fed or the Philly Fed — headquartered at 10 Independence Mall in Philadelphia, Pennsylvania, is responsible for the Third District of the Federal Reserve, which covers ...

, where it is made publicly available. The index updates with the release of new data upon which is relies, usually around eight times a month. The index does not predict an economic recession. Rather than leading the business cycle, it coincides. While it may have limited use in high-frequency finance, it serves a purpose in aiding monetary and fiscal policy by providing a quantitative measure of the current state of the economy.

References

{{reflist Indicators