Ever since the first official measure of the U.S. economy, prepared by Simon Kuznets, was submitted to Congress in 1934, substantial resources have been dedicated to developing more precise tools for systematically tracking economic conditions. A major breakthrough in this line of research came in the late 1980s with the development of monthly indexes for monitoring the current state of the economy using modern time series econometrics.1
These indexes have become an essential part of the toolkit of economists at policymaking institutions and in the private sector because they provide a systematic framework for extracting, in real time, a succinct summary of the state of the economy from the vast and continually evolving economic data. Prominent examples of such summary indexes include the Federal Reserve Bank of Chicago’s National Activity Index and the Federal Reserve Bank of Philadelphia’s State Coincident Indexes, which track the U.S. and state economies, respectively.
In recent years, the work on monthly indexes has been advanced by Borağan Aruoba, Francis X. Diebold, and Chiara Scotti’s development of a methodology for monitoring the state of the economy at even higher frequencies—weekly and daily. This work has evolved into the Philadelphia Fed’s Aruoba–Diebold– Scotti (ADS) Business Conditions Index.
This article appeared in the Fourth Quarter 2018 edition of Economic Insights. Download and read the full issue.
These indexes were developed by James Stock and Mark Watson, building on pioneering work by John Geweke, as well as by Thomas Sargent and Christopher Sims.View the Full Article