The diffusion index serves as an essential metric to assess the overall direction and momentum of economic activity. It is especially useful in capturing trends across multiple economic indicators.
This document focuses on constructing a diffusion index for the U.S. economy by examining three crucial economic variables:
Personal Consumption Expenditures (PCE): Reflects consumer spending on goods and services, forming a major part of the GDP.
Unemployment Rate (UNRATE): Indicates the proportion of the workforce currently without employment, offering a perspective on the labor market’s condition.
Consumer Price Index for All Urban Consumers (CPIAUCSL): Monitors changes in the cost of a standard basket of consumer goods and services, serving as a measure of inflationary pressures.
#US Economu diffusion data
head(data_xts,10)## [,1]
## 2010-05-01 100.00000
## 2010-06-01 100.00000
## 2010-07-01 -33.33333
## 2010-08-01 -33.33333
## 2010-09-01 100.00000
## 2010-10-01 100.00000
## 2010-11-01 100.00000
## 2010-12-01 33.33333
## 2011-01-01 100.00000
## 2011-02-01 33.33333#chicago diffusion data
head(data_xts1,10)## [,1]
## 2010-05-01 -100
## 2010-06-01 100
## 2010-07-01 100
## 2010-08-01 100
## 2010-09-01 100
## 2010-10-01 100
## 2010-11-01 100
## 2010-12-01 -100
## 2011-01-01 -100
## 2011-02-01 -100Analysis
The correlation between the U.S. and Chicago diffusion indexes is -0.04067206, indicating a very weak negative relationship. This means that as one index tends to increase, the other slightly decreases. However, this relationship is so weak that it is essentially negligible.
Interpreting Correlation:
A correlation coefficient ranges from -1 to +1. A value of -1 signifies a perfect negative linear relationship, where one variable increases as the other decreases proportionally. A value of 0 indicates no linear relationship between the variables. Conversely, a value of +1 suggests a perfect positive linear relationship, where both variables increase or decrease together proportionately.
Given the correlation of -0.04, it is evident that there is no strong linear association between the two diffusion indexes. While the negative value hints at a slight inverse relationship, its minimal magnitude suggests that the two series are essentially uncorrelated.
The US Economic Scorecard has demonstrated a fluctuating pattern, oscillating between positive and negative values within a moderate range. Notably, the scorecard has exhibited a positive trend through October, indicating a general economic recovery. In contrast, the Chicago Diffusion Index has remained consistently flat at -100 in recent months.
Interestingly, historical data shows that the Chicago Diffusion Index has mirrored fluctuations in the US Economic Scorecard during specific months in previous years. For example, in 2010 (October-November), 2011 (May-June), 2012 (July), 2014 (July), and again in November 2015, the movements of these two indices followed a mirrored pattern. However, in 2024, this pattern deviates significantly. The Chicago Diffusion Index exhibits behavior opposite to that of the US Economic Index, and it remains constant at -100, indicating no change.