The diffusion index is a critical tool used to gauge the overall direction and momentum of economic activity. It is particularly effective in summarizing trends across various economic variables.
This document explores the creation of a diffusion index for the U.S. economy by analyzing three key economic variables:
Personal Consumption Expenditures (PCE): Represents consumer spending on goods and services and is a significant component of GDP.
Unemployment Rate (UNRATE): Measures the percentage of the labor force that is unemployed, providing insights into labor market health.
Consumer Price Index for All Urban Consumers (CPIAUCSL): Tracks changes in the price level of a basket of consumer goods and services, indicating inflation trends.
Economic Activity: The fluctuations in the diffusion index likely reflect changes in economic activity. Periods of high values like 100 in indicate strong economic growth, while low values might suggest a slowdown or contraction.
Trend: The upward trend in the smoothed line suggests that, overall, the US economy has been experiencing a period of expansion.
Correaltion = -0.04067206.
correlation of -0.04067206 suggests that there is a very weak negative correlation between the U.S. and Chicago diffusion indexes. This means that, as one index increases, the other tends to decrease slightly, although the relationship is very weak (close to zero).
Interpreting Negative Correlation:
A correlation of -1 means a perfect negative linear relationship (as one variable increases, the other decreases in perfect proportion).
A correlation of 0 means no linear relationship (the variables are independent of each other). A correlation of +1 means a perfect positive linear relationship (both variables increase or decrease together in perfect proportion).
Since the correlation is -0.04, it suggests that there is little to no strong linear relationship between the two diffusion indexes. The negative value indicates a slight inverse relationship, but it’s so small that the two series are essentially uncorrelated.
The US Economic Scorecard has exhibited oscillating patterns, frequently shifting between positive and negative territory within a moderate range. Notably, the scorecard shows a positive trend through October, suggesting a general recovery. In contrast, the Chicago Diffusion Index has remained consistently flat at -100 in recent months, showing a striking pattern of mirroring fluctuations during specific months in previous years. For instance, in 2010 (October-November), 2011 (May-June), 2012 (July), 2014 (July), and again in November 2015, the movements followed a mirrored pattern. However, in 2024, this pattern diverges, with the Chicago Diffusion Index showing behavior opposite to that US Economic Index.