The ADS Business Conditions Index

by: Mark J. Perry

Every time I think I'm aware of all of the economic indicators available, I find a new one. This time it's the Philadelphia Federal Reserve's Aruoba-Diebold-Scotti Business Conditions Index, which was featured in this WSJ article on Tuesday:

"This index, which we will henceforth refer to as the ADS, takes in a variety of economic data, mashes it all together and comes out with an up-to-the-minute reading on the economy at least once a week. It saves common investors like us a lot of hard work trying to grapple with the individual pieces. The input data includes a composite of quarterly output data, unemployment indicators, industrial production, personal income less transfer payments, manufacturing/trade sales and gross-domestic-product growth.

The economic whizzes at the Philly Fed use a filter to help smooth the data so that the impact of less-frequent data, such as the GDP growth figures, blends seamlessly with more-frequent data, such as weekly new claims for unemployment insurance. The ADS looks at the entire economy, not just the Philly Fed's district. Additionally, because the ADS is updated so frequently, it's a real-time read on the economy that analysts don't have to wait a long time for, unlike the quarterly read on GDP."

MP: The ADS Index was updated today, based on first quarter real GDP and jobless claims reports, and is displayed above. As the graph shows, the ADS Index tracked the last two recessions very closely, and a chart available here back to 1960 shows that the index has accurately tracked almost all recessions over the last 50 years. And looking at the chart above, it appears that the economic expansion over the last two years is slightly stronger than the 2002-2003 expansion following the 2001 recession according to the ADS Index. I'll add this index to the indicators that I follow on a regular basis.