Business cycle measures can provide timely statistical evidence of turning points.Business cycles

Kristie M. Engemann

Michael T. Owyang

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2010 ■ Number 21
A
t the time this essay was written, the National
Bureau of Economic Research (NBER) had not yet
announced the official end of the recession. Many
economists, however, believe that it ended in mid-2009.
We discuss two business cycle measures that provide some
statistical evidence of a trough long before an NBER
announcement, which could help policymakers decide
when to exit quantitative easing.
The Philadelphia Fed publishes the Aruoba-Diebold-
Scotti business conditions index (ADS index), which is
constructed using data measured at mixed frequencies:
gross domestic product (measured quarterly); employment,
industrial production, personal income less transfer pay-
ments, and manufacturing and trade sales (measured
monthly); and initial jobless claims (measured weekly).
Ironically, the ADS index is a daily time series that contains
no daily data—the authors of the index note in their pub-
lished paper that including a daily interest rate spread (term
spread, or the difference between the 10-year T-bond and
3-month T-bill yields) did not improve the index’s perform-
ance. The index is revised whenever any series is updated.1
Economist Michael Dueker at Russell
Investments introduced a business cycle
index (Russell BCI) that is updated
around the 15th of each month. Dueker
uses both macroeconomic and financial
data to assess the current state of the
economy and make predictions for the
upcoming three years. His estimation
uses employment, inflation excluding
food and energy, the term spread, the
difference between Aaa and Baa corpo-
rate bond yields, and the difference
between commercial paper and T-bill
yields.2
The chart shows the ADS index vin-
tage from June 17, 2010 (which includes
values through June 12) and the Russell
BCI vintage from June 2010 (which
includes values through May). With the ADS index, values
above zero indicate the degree to which business conditions
are better than average, whereas the opposite holds true
for values below zero. Russell BCI values are expressed as
the number of standard deviations from zero; larger posi-
tive (negative) values indicate that conditions are farther
from a business cycle peak (trough).
Both measures show August 2009 as the first full month
with positive values since the recession began, which indi-
cates that the recession ended last July. Even though the
ADS index has dipped below zero briefly since then, the
authors of the index still classify July 2009 as the trough.
Since early February 2010, the ADS index has generally
shown steady improvement in business conditions. Addi  -
Business Cycle Measures
Kristie M. Engemann, Senior Research Associate
Michael T. Owyang, Research Officer and Economist
Business cycle measures 
can provide timely statistical 
evidence of turning points.
Business Cycle Measures
–4
–3
–2
–1
0
1
2
1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13
ADS Index
Russell BCI
Russell BCI Forecast
SOURCE: Philadelphia Fed (ADS index) and Michael Dueker at Russell Investments (Russell BCI and 
forecasts). The gray-shaded area indicates recession; the beginning is the official NBER date, and 
the end is the date indicated by the ADS index and the Russell BCI.tionally, the Russell BCI forecasts show a slight decline in
conditions with the release of June data but then fairly
steady conditions through mid-2013.
Both the ADS index and Russell BCI had already pin-
pointed July 2009 as the end of the recession in vintages
released in mid-September of 2009. Although the recession’s
end date is not official, these measures provide some idea
about the overall state of the economy. ■
1 For an introduction to the model, see Aruoba, S. Borag ˘an; Diebold, Francis X.
and Scotti, Chiara. “Real-Time Measurement of Business Conditions.” Journal of
Business and Economic Statistics, October 2009, 27(4), pp. 417-27. Additional
details on the ADS index were obtained from the Philadelphia Fed 
(www.philadelphiafed.org/research-and-data/real-time-center/business-
conditions-index/).
2 For an introduction to the model, see Dueker, Michael. “Dynamic Forecasts of
Qualitative Variables: A Qual VAR Model of U.S. Recessions.” Journal of Business
and Economic Statistics, January 2005, 23(1), pp. 96-104. Additional details on
the Russell BCI were obtained from Russell Investments
(www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp).
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on August 3, 2010
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Business cycle measures

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Business cycle measures

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