-ECON 6635-01

-Pompea College of Business

-University of New Haven

-Lokeshwar Rao

0.0.1 Introduction

A thorough understanding of the U.S. economy necessitates examining both national trends and regional economic signals. In this study, we create a custom diffusion index based on key indicators: employment, industrial production, and housing starts. This index measures economic expansions and contractions. By comparing it to the Chicago Fed National Activity Diffusion Index (CFNAIDIFF), we aim to reveal important patterns and divergences, offering deeper insights into overall economic performance and sector-specific behavior over time.

0.0.2 Data selection and Diffusion Index Construction.

Employment: Reflects the strength of the labor market and provides insights into workforce trends and job growth or decline.

Industrial Production: Measures the output of the manufacturing, mining, and utilities sectors, highlighting changes in industrial activity.

Housing Starts: Indicates the level of new residential construction, offering clues about trends in the housing market and consumer confidence.

Together, these indicators help identify patterns of economic expansion and contraction, providing a comprehensive view of overall economic performance.

## [1] "PAYEMS"    "INDPRO"    "HOUST"     "CFNAIDIFF"

0.0.3 Analysis of USA Diffusion Index

The U.S. Economic Diffusion Index over time shows clear patterns of economic expansion and contraction. The blue line, representing the custom Diffusion Index, demonstrates frequent fluctuations, while the red smoother line highlights a gradual long-term decline. Between 2010 and 2020, the index remained mostly above 50%, indicating economic growth, though there were signs of weakening momentum leading up to 2020. The onset of the COVID-19 pandemic in March 2020 caused a sharp decline, pushing the index below 0%, reflecting widespread economic disruption. In the period from 2020 to 2025, the index rebounded but settled at a lower level than before the pandemic, with a final value of -33.33%, suggesting ongoing challenges and a slow recovery. This analysis emphasizes the significant economic shock of the pandemic and the uneven recovery that followed.

0.0.4 Analysis of Chicago Economic Diffusion Index

The Chicago Economic Diffusion Index (CFNAIDIFF) from 2010 to 2025 shows significant fluctuations and trends in economic performance. Between 2010 and 2016, the index steadily declined, reflecting a period of economic weakness or contraction. From 2016 to 2020, the index remained near zero, indicating stagnation or minimal recovery. After the initial shock of the COVID-19 pandemic in 2020, the index briefly increased, signaling a temporary rebound. However, from 2023 onward, the index fell sharply below zero, suggesting renewed economic difficulties. The recurring shifts between expansion and contraction illustrate ongoing volatility and uncertainty. The widening confidence bands toward 2025 further emphasize growing unpredictability in economic conditions. Overall, the long-term trend reveals persistent economic challenges, highlighting the need for continuous monitoring to understand future developments.

0.0.5 Stability and Volatility Compared

The US Diffusion Index demonstrates a positive trend, with a mean of 42.1 and moderate variability (SD = 52.5), indicating steady national economic growth. In contrast, the Chicago Diffusion Index shows a negative mean of -2.9 and significant variability (SD = 100.2), reflecting frequent and severe economic downturns. This contrast highlights the relative stability of national trends compared to the higher volatility seen at the regional level.

## [1] 0.0703

0.0.6 Analysis Of The Combined US & Chicago Diffusion Indices

The combined analysis of the USA Economic Diffusion Index and the Chicago Diffusion Index (CFNAIDIFF) from 2010 to 2025 highlights key national and regional trends. The USA Diffusion Index shows frequent fluctuations but generally trends toward economic expansion. In contrast, the Chicago Diffusion Index exhibits a steady downward trend, particularly between 2010 and 2016, indicating regional economic weakness. A brief recovery in 2020 is followed by a sharp decline after 2023, reflecting renewed challenges. The divergence between the indices underscores the resilience of national trends compared to localized contractions. The moderate correlation suggests some shared influences, though regional factors create distinct patterns. This emphasizes the importance of monitoring both national and regional indicators for a comprehensive economic outlook.

0.0.7 Coorelation

The correlation coefficient between the USA Economic Diffusion Index and the Chicago Diffusion Index reflects a very weak positive relationship. This implies that the two indices rarely move in sync, suggesting minimal correlation between national and regional economic trends. Changes in the USA Diffusion Index do not consistently align with changes in the Chicago Diffusion Index.

0.0.8 Current Economic Insights

The economy is exhibiting signs of slowing growth or mild contraction, with weaknesses in key sectors such as employment, industrial production, and housing contributing to this downturn. Persistent economic volatility, driven by factors like inflation, high interest rates, and global uncertainties, further complicates the outlook. While national trends may seem stable, certain regions and sectors face more pronounced challenges. Overall, the indices reflect a fragile economic state, with potential risks of deeper slowdown if these issues persist. Continuous monitoring of economic indicators in the coming months will be essential to determine whether the economy stabilizes or continues to weaken.

0.0.9 Conclusion

This report analyzed and compared diffusion indices for three key economic variables in the United States and the Chicago region between January 2010 and October 2024. The findings highlighted periods of economic growth and contraction, with significant fluctuations in both indices. The COVID-19 pandemic caused a pronounced downturn, reflecting the widespread economic impact. The Chicago Index exhibited greater volatility than the U.S. Index, emphasizing the need to consider both regional and national trends. A comprehensive understanding of economic conditions requires examining how various factors influence local and national economies differently.

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