By New Deal Democrat
Last week the Chicago Fed announced backdated revisions to its Adjusted Financial Conditions Index. Since this changes their interpretation somewhat, I wanted to flesh this out.
The Chicago Fed has a "Financial Conditions Index" which is self-explanatory, as well as several sub-indexes, one of which, the "leverage" subindex, it has identified as leading. It also has an "Adjusted Financial Conditions Index," which is supposed to calibrate how loose or tight credit conditions are *relative to* background economic conditions - i.e., are financial conditions more or less tight than they have typically been given the data background.
Because the Adjusted Index appeared to track, and somewhat lead, the Senior Loan Officers Survey, and because it is reported weekly rather than quarterly, I report this Index every weekend.
The "updates" to the Index change its values considerably. First of all, the new Adjusted Index is much less volatile, but also somewhat less leading:
Secondly, it no longer leads the un-adjusted index at all in terms of peaks or troughs, although it does appear to have higher (i.e., more tight) values in the several years leading up to recessions:
If we add +0.5 to the value of the updated Adjusted Index, and average it over a quarter, it does appear typically to lead the Senior Loan Officer Survey by one or two quarters, although note the exception from 2014-16:
With that modification (i.e., adding +0.5 to the Adjusted Index as the line between "loose" and "tight" credit conditions), I will continue to track it weekly as a long leading indicator of promise.