[PPT] - NABE Economic Measurement Seminar: Federal Reserve District Research PowerPoint Presentation

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys An Introduction to the Chicago Fed’s Activity Indexes

Scott A. Brave

The views expressed herein are my own and do not necessarily represent those of the Federal Reserve Bank of Chicago. Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 1 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

1 National Activity Index 2 Brave-Butters-Kelley Indexes 3 Midwest Economy Index 4 Detroit Economic Activity Index 5 Survey of Business Conditions 6 National Financial Conditions Index

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 2 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The Chicago Fed National Activity Index (CFNAI) A monthly summary statistic for U.S. economic growth

Weighted average of 85 indicators of U.S. economic activity
Weights capture the relative importance to historical fluctuations
Estimated by principal components analysis
Covers four broad categories of data

1

Production and Income: e.g., Industrial Production

2

Employment, Unemployment, and Hours: e.g., Payroll Employment

3

Personal Consumption and Housing: e.g., Housing Starts

4

Sales, Orders, and Inventories: e.g., Manufacturing & Trade Sales

First introduced in Evans, Liu, and Pham-Kanter (2002)
Released toward the end of each month at chicagofed.org/cfnai

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 3 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

CFNAI-MA3 and Business Cycles

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

8
6
4
2

2

+0.2

0.7

Above −0.7 characteristic of periods of economic expansion Below −0.7 increasing chance of recession | Above +0.2 significant chance of recovery

The Chicago Fed National Activity Index and Business Cycles

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 4 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI 1.18 (Jul) 3.84 (Jul)

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15
12
9
6
3

3 6 1960 1970 1980 1990 2000 2010 2020 CFNAI ADSBCI standard deviations from trend The Aruoba-Diebold-Scotti Business Conditions Index (ADSBCI) is produced by the Federal Reserve Bank of Philadelphia.

Chicago Fed Insights: Measuring the Decline in Economic Activity (Jun 15, 2020) Measuring the Recovery in Economic Activity (Aug 5, 2020)

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 5 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The Brave-Butters-Kelley Indexes (BBKI) Business Cycle Indexes and Monthly GDP Growth

A mixed-frequency collapsed dynamic factor analysis of U.S. GDP
An application of ”big data” in macroeconomics to
U.S. business cycles and
Monthly measurement of U.S. GDP growth
Longer history based on 500 monthly indicators and quarterly GDP
More closely aligned with historical U.S. recessions and expansions
Available monthly at chicagofed.org/bbki

For more information see: Technical report

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 6 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

BBK Coincident Index vs. CFNAI-MA3

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2 4 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 BBK Coincident Index CFNAI-MA3 standard deviations

A new “big data” index of U.S. economic activity

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 7 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

BBK Leading Index vs. Conference Board Leading Economic Index

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2 4 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 BBK Leading Index Conference Board Leading Index standard deviations The Conference Board Leading Economic Index was accessed via Haver Analytics.

A “big data” view of the U.S. economy: Introducing the BBKI

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 8 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Trend-Cycle Decomposition of U.S. real GDP growth, 2017-20

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2017:Q2 2017:Q4 2018:Q2 2018:Q4 2019:Q2 2019:Q4 2020:Q2 Real gross domestic product Trend Cycle Irregular log annualized percent change Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 9 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Cumulative decline in BBK Monthly GDP since February 2020

11.47
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8
6
4
2

2 Feb Mar Apr May Jun log percent change 2020

Measuring the Recovery in Economic Activity (Aug 5, 2020)

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 10 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

BBK Monthly GDP Growth vs. Weekly Economic Index (WEI)

10.82

(Jun)

7.24

(Jul)

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5

5 2007 2012 2016 2021 BBK Monthly GDP Growth WEI scaled to yr/yr real GDP growth The WEI is produced by the Federal Reserve Bank of New York.

Measuring the Recovery in Economic Activity (Aug 5, 2020)

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 11 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The Midwest Economy Index (MEI) Similar to the CFNAI, but for the Midwest nonagricultural economy

Weighted average of 129 state/regional indicators
Estimated by principal components analysis
Covers four broad sectors of the Midwest economy
Manufacturing, Services, Construction and Mining, Consumer Spending
Spans the five states in the Seventh Federal Reserve District
IL, IN, IA, MI, WI
First introduced in Brave and Lu (2010)
Released near the end of each month at chicagofed.org/mei

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 12 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

MEI and the CFNAI-MA3

1980 1985 1990 1995 2000 2005 2010 2015 2020

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8
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2 MEI Chicago Fed National Activity Index (CFNAI-MA3) Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 13 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Relative MEI and the CFNAI-MA3

1980 1985 1990 1995 2000 2005 2010 2015 2020

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2 Relative MEI Chicago Fed National Activity Index (CFNAI-MA3) Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 14 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Detroit Economic Activity Index (DEAI) A monthly summary statistic for Detroit economic growth

Estimated by mixed frequency dynamic factor analysis
Summarizes 24 annual, quarterly and monthly time series
Covers city income, labor, real estate, and trade data
Can be used to estimate GDP for the City of Detroit
And forecast the City of Detroit’s real per capita income
Released quarterly at chicagofed.org/deai

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 15 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Detroit Economic Activity Index (DEAI)

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4
2

2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 standard deviations

Tracking Detroit’s Economic Recovery After Bankruptcy with a New Index

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 16 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Detroit Gross City Product (GCP)

109.9 90 100 110 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Estimated Projected index, 1997 = 100

Michigan Economy Blog:

– Detroit Economic Growth Decreased Substantially in March to Its Lowest Level Since the Great Recession, According to Chicago Fed Index (Jun 4, 2020)

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 17 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Detroit Real Per Capita Income

14,810 15,611 16,784 17,667 18,427 19,092 10,000 15,000 20,000 2014 2015 2016 2017 2018 2019 Actual Projected inflation-adjusted dollars

Measuring Detroit’s Economic Progress with the DEAI

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 18 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The Chicago Fed Survey of Business Conditions (CFSBC) Survey conducted 12 times per year released at chicagofed.org/cfsbc

Described in Brave and Walstrum (2014, 2015)
Over 800 business contacts from a wide variety of industries
Average response rate of approx. 10% (75% repeat responders)
About equal percentage from goods and services industries
Covers activity, hiring, capital spending, labor and nonlabor costs

Ex: How did demand for your firm’s goods or services change?

Large increase
Medium increase
Small increase
No change
Small decrease
Medium decrease
Large decrease

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 19 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

CFSBC Activity Index

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 20 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

CFSBC Manufacturing vs. Nonmanufacturing Industries FAQs

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 21 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The National Financial Conditions Index (NFCI) Weekly update on U.S. financial conditions at chicagofed.org/nfci

Weighted average of 105 indicators of financial activity
Weights capture relative importance to historical fluctuations
Estimated by mixed-frequency dynamic factor analysis
Broad coverage of the financial system

1

Money markets

2

Debt and Equity markets

3

Traditional and “Shadow” banking systems

Useful in monitoring financial stability and forecasting

Brave and Butters (2012)
Brave and Butters (2011)

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 22 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

The NFCI and ANFCI FAQs

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 23 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Risk, Credit, and Leverage Subindexes

Risk is a coincident, Credit a lagging, and Leverage a leading indicator of financial stress

Diagnosing the Financial System

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 24 / 26

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Nonfinancial Leverage Subindex

Nonfinancial leverage is a leading indicator of financial stress and recessions

Detecting Early Signs of Financial Instability

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 25 / 26

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Chicago Fed NAI BBKI MEI DEAI SBC NFCI

Additional information available at chicagofed.org/research/data/index And in Alternative Economic Indicators available from the Upjohn Institute Register for electronic notifications at chicagofed.org/utilities/subscribe Contact: Scott Brave Economic Research Federal Reserve Bank of Chicago 312-322-5784 sbrave@frbchi.org

Scott A. Brave (FRB Chicago) NABE Economic Measurement Seminar: Federal Reserve District Research and Surveys August 31, 2020 26 / 26