Real-Time Real Economic Activity:

Exiting the Great Recession and

Entering the Pandemic Recession

Francis X. DieboldUniversity of Pennsylvania

December 16, 2020

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ADS Index

Real-time nowcasting · Guiding decisionsRigorous · Replicable · Optimal

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Real Growth Indicators

Initial unemployment claims

Payroll employment

Industrial production

Personal income less transfers

Manufacturing and trade sales

GDP

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The Dynamic Factor Model Framework

Real growth factor:

xt = φxt−1 + ηt

i-th growth indicator:

y it = ci + βixt + εit

Stock and Watson (1989 NBER Macro Annual)Aruoba, Diebold and Scotti (2009 JBES)

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State Space Representation

yt = Zαt + Γwt + εt

αt+1 = Tαt + Rηt

εt ∼ (0,H) , ηt ∼ (0,Q)

t = 1, ..., T

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Filtering and Smoothing

at|t = at + PtZ′F−1

t vt

Pt|t = Pt − PtZ′F−1

t ZP ′tat+1 = Tat|t

Pt+1 = TPt|tT′ + RQR ′

vt = yt − Zat − Γwt

Ft = ZPtZ′ + H

at|t ≡ E (αt |Yt), Pt|t = var (αt |Yt), at ≡ E (αt |Yt−1),Pt = var (αt |Yt−1), Yt ≡ {y1, ..., yt}, t = 1, ..., T

Likelihood Evaluation · Model Estimation · Optimal Extraction

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Lots of Interesting Issues...

“Small data”

Mixed-frequency data

Daily, with lots of missing data

High-dimensional state

Time-varying system matrices

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ADS Index: Ex Post Path 03/01/1960 - 12/31/2013 (Vintage 6/26/2020)

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ADS Index: Ex Post Path 12/1/2007 - 6/26/2020 (Vintage 6/26/2020)

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Evaluating and Using ADS

What do we believe ex post?

What was believed in real time and how does it compare?

Relation to COVID-19?

—–

Where is ADS right now?

Relation to other indexes?

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Real Time Means Real Time

Full-sample estimation, final revised data

Expanding-sample estimation, final revised data

Expanding-sample estimation, vintage data(Pseudo Real Time)

Expanding-sample estimation, vintage information(Real Time)

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Vintage Information

Economic theory and empirical economic experience evolve. Over time this mayprompt, for example, the removal or re-weighting of some component nowcastindicators and/or addition of others, as well as deeper changes in the nowcastingmodel.

Econometric/statistical theory and experience evolve, prompting changes to theestimation procedure; the frequency and timing of re-estimation and its interactionwith benchmark revisions; the estimation sample period; allowance for parametervariation and breaks; the treatment of outliers; the strength of regularizationemployed; the predictive loss function employed; etc.

Exact times and reliability of nowcast/forecast calculation and release may differ dueto technological problems; outright mistakes in nowcast/forecast construction;evolving or changing software algorithms and associated bugs; parallel problems at theagencies responsible for the underlying data and decisions regarding how to deal withthem in forecast/nowcast construction; etc.

ADS enables vintage-information examination ofGreat Recession exit and Pandemic Recession entry

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Exiting the Great Recession: Path Plot

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Exiting the Great Recession: Full Path Plot

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Exiting the Great Recession: Real-Time Dot Plot

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Entering the Pandemic Recession: Late-Vintage Path

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Entering the Pandemic Recession: Path Plot

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Entering the Pandemic Recession: Full Path Plot

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Entering the Pandemic Recession: Dot Plot

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U.S. COVID Deaths

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Smoothed COVID Deaths+20

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COVID and Real Growth

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Latest ADS Paths (12/16/2020, 10:00 ET)

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Latest Chicago Fed Index (12/16/2020, 10:00 ET)

2018 2019 2020 2021

-18

-15

-12

-9

-6

-3

0

3

6

CFNAI

above

trend

below

Chicago Fed National Activity Index

What is the National Activity Index?The index is a weighted average of 85 indi-cators of growth in national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal con-sumption and housing; and 4) sales, orders, and inventories.

Why are there three index values?Each month, we provide a monthly index (the CFNAI), its three-month moving average, and a diffusion index. Month-to-month movements can be volatile, so the monthly index’s three-month moving average, the CFNAI-MA3, provides a more consistent picture of national economic growth. The CFNAI Diffusion Index instead captures the degree to which a change in the monthly index is spread out among its 85 indicators, averaged over a three-month period.

What do the numbers mean?A zero value for the monthly index has been associated with the national economy ex-panding at its historical trend (average) rate of growth; negative values with below-average growth (in standard deviation units); and positive values with above-average growth. Periods of economic expansion have histor-ically been associated with values of the CFNAI-MA3 above –0.70 and the CFNAI Diffusion Index above –0.35. Conversely, periods of economic contraction have his-torically been associated with values of the CFNAI-MA3 below –0.70 and the CFNAI Diffusion Index below –0.35. An increasing likelihood of a period of sustained increasing inflation has historically been associated with values of the CFNAI-MA3 above +0.70 more than two years into an economic expansion. Similarly, a substantial likelihood of a period of sustained increasing inflation has historically been associated with values of the CFNAI-MA3 above +1.00 more than two years into an economic expansion.

The next CFNAI will be released:December 21, 20208:30 am Eastern Time7:30 am Central Time

News Release Embargoed for release:8:30 am Eastern Time7:30 am Central TimeThe next CFNAI will be released:November 23, 2020

Contact: Michael AdlemanMedia RelationsFederal Reserve Bank of Chicago

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.83 in October from +0.32 in September. Three of the four broad categories of indicators used to construct the index made positive contributions in October, and three of the four categories increased from September. The index’s three-month moving average, CFNAI-MA3, fell to +0.75 in October from +1.37 in September.

The CFNAI Diffusion Index, which is also a three-month moving average, edged down to +0.51 in October from +0.55 in September. Sixty-one of the 85 individual indicators made positive contributions to the CFNAI in October, while 24 made negative contributions. Fifty-four indicators improved from September to October, 30 indicators deteriorated, and one was unchanged. Of the indicators that improved, eight made negative contributions.

Current and Previous values reflect index values as of the November 23, 2020, release and October 26, 2020, release, respectively.N/A indicates not applicable.

CFNAI, CFNAI-MA3, and CFNAI Diffusion for the Latest Six Months and Year-Ago Month

Index suggests economic growth increased in October

Chicago Fed National Activity Index, by Categories

Production and income Personal consumption and housingEmployment, unemployment, and hours Sales, orders, and inventories

Oct ’20 Sep ’20 Aug ’20 Jul ’20 Jun ’20 May ’20 Oct ’19CFNAICurrent +0.83 +0.32 +1.10 +2.68 +5.87 +4.29 −0.41Previous N/A +0.27 +1.11 +2.61 +5.93 +4.22 −0.41

CFNAI-MA3Current +0.75 +1.37 +3.22 +4.28 −2.52 −5.93 −0.20Previous N/A +1.33 +3.22 +4.25 −2.53 −5.96 −0.19

CFNAI DiffusionCurrent +0.51 +0.55 +0.72 +0.75 +0.16 −0.42 −0.17Previous N/A +0.51 +0.71 +0.74 +0.16 −0.42 −0.17

Dynamic factor model (of course) but otherwise very different:Different people, different indicators (approx 100), different estimation (PC),different data frequency (monthly), different nowcasting frequency (monthly)

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Latest COVID Deaths Paths (12/16/2020, 10:00 ET)

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Conclusions

Credible real activity growth nowcasting(but noisier in the Pandemic Recession)

Credible real activity growth chronology ex post

Above-average real activity growth resumed in May

Tighten your seat belts for the next two months!

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