Monitoring Economic Activity in Real Time Using Diffusion Indices: Evidence from the Fifth District

27 Pages Posted: 4 Nov 2016

See all articles by Santiago Pinto

Santiago Pinto

Federal Reserve Banks - Federal Reserve Bank of Richmond

Sonya Waddell

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: 2015

Abstract

We provide an analysis that parses out the conditions under which diffusion indices based on disaggregated information are informative about overall economic activity. Building on work by Pinto, Sarte, and Sharp (2015), we highlight the fact that diffusion indices, appropriately scaled, capture contributions of changes in the extensive margin -- e.g. how many sectors are growing or declining rather than by how much individual sectors are growing or declining -- to aggregate growth. In the Fifth Federal Reserve District, for example, this margin captures the bulk of variations in aggregate employment growth. We then show that the Fifth District employment index, produced in real time using firm-level surveys, closely tracks a synthetic diffusion index constructed ex post using observed data. However, we also underscore that diffusion indices have their limitations. In the Fifth District, for example, the growth rate of average wages (relative to its mean) is frequently of a sign opposite to that indicated by changes in the extensive margin. Finally, we explore some of the implications of producing diffusion indices at a more localized level.

Suggested Citation

Pinto, Santiago and Waddell, Sonya and Sarte, Pierre-Daniel, Monitoring Economic Activity in Real Time Using Diffusion Indices: Evidence from the Fifth District (2015). Economic Quarterly, Issue 4Q, pp. 275-301, 2015. Available at SSRN: https://ssrn.com/abstract=2864237 or http://dx.doi.org/10.21144/eq1010401

Santiago Pinto (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Sonya Waddell

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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