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

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  • Santiago Pinto
  • Pierre-Daniel G. Sarte
  • Sonya Ravindranath Waddell

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

  • Santiago Pinto & Pierre-Daniel G. Sarte & Sonya Ravindranath Waddell, 2015. "Monitoring Economic Activity in Real Time Using Diffusion Indices: Evidence from the Fifth District," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 275-301.
    • Handle: RePEc:fip:fedreq:00038
    DOI: 10.21144/eq1010401
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    References listed on IDEAS

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    1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
    2. Dean Croushore, 2011. "Frontiers of Real-Time Data Analysis," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 72-100, March.
    3. Santiago Pinto & Pierre-Daniel G. Sarte & Robert Sharp, 2015. "Learning About Consumer Uncertainty from Qualitative Surveys: As Uncertain As Ever," Working Paper 15-9, Federal Reserve Bank of Richmond.
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    Cited by:

    1. Pedro Elosegui & Mirta González & María Cecilia Pérez & Máximo Sangiácomo, 2022. "A Diffusion Index Analysis of the Argentinean Business Economic Cycle During the COVID-19 Pandemic," BCRA Working Paper Series 2022105, Central Bank of Argentina, Economic Research Department.
    2. Michael E. Trebing, 2017. "Regional Spotlight: Surveying the South Jersey Economy," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 2(2), pages 18-26, April.
    3. Nika Lazaryan & Santiago Pinto, 2017. "Using the Richmond Fed Manufacturing Survey to Gauge National and Regional Economic Conditions," Economic Quarterly, Federal Reserve Bank of Richmond, issue Q1-Q4, pages 81-137.

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