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STATE OF THE

ECONOMY INDEX
Amber Cox
Nadette James
Luis Loret de Mola
Multiple Economic Indicators Reveal State of Economy

Nonfarm Employment Average Hours Weekly Manufacturing


0.05 0.05
Percent Change

Percent Change
0.025
0.025

0
-0.025

-0.05 -0.025
1971 1979 1987 1995 2003 2011 1971 1979 1987 1995 2003 2011

Wages Unemployment Rate

0.1

Percent Change
Percent Change

0.25

0.05

0
0

-0.05 -0.25
1971 1979 1987 1995 2003 2011 1971 1979 1987 1995 2003 2011
Combining Indicators Creates Index

State of the Economy


0.8

0.4
Percent Change

-0.4

-0.8

-1.2
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

State of the Economy


Goals

Goals

Create FL & MSA State of the Economy Indices

Goals

Create FL & MSA State of the Economy Indices

Forecast FL & MSA State of the Economy Indices

Goals

Create FL & MSA State of the Economy Indices

Forecast FL & MSA State of the Economy Indices

Create FL & MSA Economic Downturn Indices


Creation of Florida State of the Economy Index

Florida State of the


Economy Index

Labor Market Unemployment Wages


Tourism
Rate
Creation of Florida State of the Economy Index

Florida State of the


Economy Index

Nonfarm Employment
Retail Employment Unemployment Wages
Tourism
Real Estate Employment Rate
Creation of Florida State of the Economy Index

Florida State of the


Economy Index

Nonfarm Employment
Total Airline Passengers
Retail Employment Unemployment Wages
Total Aircraft Operations Rate
Real Estate Employment
Index Created Using
Dynamic Factor Model

Dynamic
Factor
Model

James Stock, Harvard University and Mark Watson, Princeton University

Measures Variance and Covariance of Observed Variables Through Single Unobserved Factor

Unobserved Factor Expresses Common Relationship Among Observable Variables


Creation of Florida State of the Economy Index

Florida State of the


Economy Index

Nonfarm Employment
Total Airline Passengers
Retail Employment Unemployment Wages
Total Aircraft Operations Rate
Real Estate Employment
Creation of Florida State of the Economy Index

St

X1 X2 X3 X4
Index Created Using
Dynamic Factor Model

Dynamic Equation 1
Factor
Model Equation 2
Index Created Using
Dynamic Factor Model

= State of the Economy


Growth Rate
= + +
Dynamic
Factor
Model Equation 2
Index Created Using
Dynamic Factor Model

= State of the Economy


Growth Rate
= + +
Dynamic = Macro Variables
Factor Growth Rate
Model Equation 2
Index Created Using
Dynamic Factor Model

= + +
Dynamic
Factor
Model State of the Economy
= + 1 st + t Growth Rate Evolves
Through Time
Florida State of the Economy Index Coincident with Employment

8170

7870
Thousands of People

7570

7270

6970
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

FL SOE FL EMPLOYMENT
Florida State of the Economy Index Coincident with Employment

8170

Correlation = 0.89

7870
Thousands of People

7570

7270

6970
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

FL SOE FL EMPLOYMENT
Turning Points
Accurately Fitted
8100

Employment
Turning Point
Accurately Fitted
8050

Thousands of People

8000

7950

7900
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08

FL SOE FL EMPLOYMENT
Creation of Miami
State of the Economy Index
Miami State of the
Economy Index

Labor Market Home Price Wages


Tourism
Index
Creation of Miami
State of the Economy Index
Miami State of the
Economy Index

Nonfarm Employment
Home Price Wages
Retail Employment Tourism
Index
Financial Employment
Creation of Miami
State of the Economy Index
Miami State of the
Economy Index

Nonfarm Employment
Aircraft Seats Per Mile Home Price
Retail Employment Wages
Revenue Passenger-Miles Index
Financial Employment
Miami
State of the Economy Index

0.8

0.4
Percent Change

-0.4

-0.8

-1.2
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15

Miami's SOE
Miami
State of the Economy Index

0.8

0.4
Percent Change

0
Dec 2015
-0.11% Growth
-0.4

-0.8

-1.2
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15

Miami's SOE
Forecasting
State of the Economy

Current
Index

Mar-15
Jul-15 Sept-15
Jan-16 Mar-16
Jul-16 Sept-16Jan-17

State of the Economy Index


Forecasting
State of the Economy

Growth

?
Current 6 Months
Index from Current
Index

Mar-15
Jul-15 Sept-15
Jan-16 Mar-16
Jul-16 Sept-16Jan-17

State of the Economy Index


Forecasting
State of the Economy
Leading
State of the
Economy Index

Growth

?
Current 6 Months
Index from Current
Index

Mar-15
Jul-15 Sept-15
Jan-16 Mar-16
Jul-16 Sept-16Jan-17

State of the Economy Index


Leading State of Economy Index Created
Using Vector Autoregression

VAR
= 1 1 + 2 1 +
= 3 1 + 4 1 +

Captures interdependencies
among multiple variables
Variable Selection
Methodology
Leading Indicators

Manufacturing
Delivery Times

New Private
Housing Permits
Unemployment
Insurance Claims State of the
Data VAR Economy Index

Consumer
Sentiment Index

FL Stock Index

Interest Rate
Spread
Variable Selection
Methodology
Leading Indicators

Manufacturing
Delivery Times

New Private
Housing Permits
Unemployment
Insurance Claims State of the
Data VAR Economy Index

Consumer
Sentiment Index

FL Stock Index

Interest Rate
Spread
Variable Selection
Methodology
Leading Indicators

Manufacturing
Delivery Times

New Private
Housing Permits
Unemployment
Insurance Claims State of the
Data VAR Economy Index

Consumer
Sentiment Index

FL Stock Index

Interest Rate
Spread
Variable Selection
Methodology
Leading Indicators

Manufacturing
Delivery Times

New Private
Housing Permits
Unemployment
Insurance Claims State of the
Data VAR Economy Index

Consumer
Sentiment Index

FL Stock Index

VAR has Parameter Restrictions


Interest Rate
Spread Tried 20 Combinations of
3 Variables
Forecasted vs Actual
6 Month Growth

t
Forecasted vs Actual
6 Month Growth

t t+6
Forecasted vs Actual
6 Month Growth

Expected

t t+6
Forecasted vs Actual
6 Month Growth

Expected

t t+6
Forecasted vs Actual
6 Month Growth

Expected

Actual

t t+6
Forecasted vs Actual
6 Month Growth

Expected

Actual

t t+6
Forecasted vs Actual
6 Month Growth

Expected

Actual

t t+6
Forecasted vs Actual
6 Month Growth

Expected

Actual

t t+6
Florida Leading State of the Economy Index Fits Actual Six Month Growth
6

4
6 Month Growth Rate

-2

-4

-6
Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate


Florida Leading State of the Economy Index Fits Actual Six Month Growth
6

Correlation = 0.85
4
6 Month Growth Rate

-2

-4

-6
Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate


Creation of Miami Leading State of the Economy Index

Miami Leading State


of the Economy Index

Miami State of the New Private Interest Rate Miami Stock


Economy Index Housing Permits Spread Index
Miami Leading State of the Economy Index Fits Actual Six Month Growth
4

2
6 Month Growth Rate

-2

-4

-6
Dec-06 Dec-09 Dec-12 Dec-15

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate


Miami Leading State of the Economy Index Fits Actual Six Month Growth
4

2
6 Month Growth Rate

Correlation = 0.94
-2

-4

-6
Dec-06 Dec-09 Dec-12 Dec-15

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate


Creating Florida Economic Downturn Index
Current
SOE
0.3

6 Months
0.1
from SOE
FL State of the Economy

-0.1

-0.3

-0.5

-0.7

-0.9

-1.1
Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16
Classifying Economic Downturn

0.3

4 Months
0.1
FL State of the Economy

-0.1

-0.3

-0.5

-0.7

-0.9

-1.1
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
Classifying Economic Downturn

0.3

4 Months
0.1
FL State of the Economy

DOWNTURN
-0.1

-0.3

-0.5

-0.7

-0.9

-1.1
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
Economic Downturn Index
Created

Probability of Downturn = ( Leading SOE )


Economic Downturn Index
Created

Probability of Downturn = ( Leading SOE )

(1,0) (Continuous Variable)


Economic Downturn Index
Created Using Probit Model
Probit
Linear
1 1

0.5

0 0

Line goes below 0 and above 1 Represents inverse cumulative probability


distribution between 0 and 1
Florida Economic Downturn Index
100% 8300

8100

80%
Economic Downturn Probability

7900

State of the Economy Index


60%
7700

7500
40%

7300

20%

7100

0% 6900
Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

PROBABILITY FSOE
Florida Economic Downturn Index
100% 8300

8100

80%
Economic Downturn Probability

7900

State of the Economy Index


60%
7700 March 2016
Probability of
7500 Downturn 5%
40%

7300

20%

7100

0% 6900
Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

PROBABILITY FSOE
Miami Economic Downturn Index

100% 2570

2520

80%
2470
Economic Downturn Probability

State of the Economy Index


2420

60%
2370

2320
40%

2270

2220
20%

2170

0% 2120
Dec-06 Dec-09 Dec-12 Dec-15

PROBABILITY FSOE
Miami Economic Downturn Index

100% 2570

2520

80%
2470
Economic Downturn Probability

State of the Economy Index


2420

60%
2370 Dec 2015
Probability of
2320
40%
Downturn 6%
2270

2220
20%

2170

0% 2120
Dec-06 Dec-09 Dec-12 Dec-15

PROBABILITY FSOE
Economic Data Released With Lags

March April May June July

Most Recent Today


Data Release

Missing Data
What is Nowcasting?

Nowcasting

Forecasting Lagged Values to get Current Values

Observe State of the Economy Sooner


What is Google Trends?

Measures Volume of Searches for Categorized Queries

Weekly Data

Compacted to Monthly and Seasonally Adjusted


Nowcasting Model with Google Trends
AR(1)
+

Hal Varian, Chief Economist at Google

= + 1 + +
Growth Rate

0.1
0.2
0.3
0.4

0
Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16
Nowcasted Florida State of Economy Index

Apr-16

May-16

Jun-16
Growth Rate

0.1
0.2
0.3
0.4

0
Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16
Nowcasted Florida State of Economy Index

Apr-16

May-16

Jun-16
Growth Rate

0.1
0.2
0.3
0.4

0
Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16
Nowcasted Florida State of Economy Index

Apr-16
June 2016
0.12 % Growth

May-16

Jun-16
Nowcasted Florida Leading State of Economy Index

0.5

0.4
Growth Rate

0.3

0.2

0.1

0
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
Nowcasted Florida Leading State of Economy Index

0.5

0.4
Growth Rate

0.3

0.2

0.1

0
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
Nowcasted Florida Leading State of Economy Index

0.5

0.4
Growth Rate

0.3

0.2

0.1

0
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
Nowcasted Florida Leading State of Economy Index

0.5 July - Dec 2016


0.5% Growth

0.4
Growth Rate

0.3

0.2

0.1

0
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
Nowcasted Florida Economic Downturn Index
50% 0.3

0.25
40%

0.2

30%
27%
0.15

20%

0.1

10%
0.05

0% 0
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

ACTUAL PROBABILITY NOWCASTED PROBABILITY


ACTUAL FSOE NOWCASTED FSOE
Other Useful Applications

Our Nonfarm Employment June Estimate:


Other Useful Applications

Our Nonfarm Employment June Estimate: 10,000 Jobs


Other Useful Applications

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June:


Other Useful Applications

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs


Other Useful Applications

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs

6 Month Nonfarm Employment Estimate July December 2016:


Other Useful Applications

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs

6 Month Nonfarm Employment Estimate July December 2016:

41,000 Jobs
Results

Florida State of the Economy Index: 0.12% Growth as of June 2016

Florida Leading State of the Economy Index: 0.5% Growth


between July-Dec 2016

Florida Economic Downturn Index: 27% Probability of


Economic Downturn as of June 2016
What We Have Done

Estimated State of the Economy Index for: Florida & MSAs


What We Have Done

Estimated State of the Economy Index for: Florida & MSAs

Forecasted State of the Economy Index for: Florida & MSAs


What We Have Done

Estimated State of the Economy Index for: Florida & MSAs

Forecasted State of the Economy Index for: Florida & MSAs

Gave Probability of Economic Downturn for: Florida & MSAs


What We Have Done

Estimated State of the Economy Index for: Florida & MSAs

Forecasted State of the Economy Index for: Florida & MSAs

Gave Probability of Economic Downturn for: Florida & MSAs

Used Indices to Forecast Employment 1 Month and 6 Months Ahead


Variable Selection Criteria
FL Regular Gas Sales
A static factor captures the fixed common variance
and covariance between a set of variables, it does not
evolve through time

We construct static factor using a large variety of


macroeconomic variables (to capture common
variance and covariance among the many variables)
FL Retail Employment
Compute cross-correlations between static factor and
each individual variable

Choose variables which are highly correlated with


static factor, our cut off was a 0.50 correlation
Implementing Google Trends
Implementing Google Trends
Implementing Google Trends
Implementing Google Trends
Google Trends Help Forecast Florida State of Economy Input Variables

Variable ( ) Google Trends Query


Nonfarm Payroll Job Interview Questions

Retail Employment Tickets to Florida

Real Estate Employment House Loan

Unemployment Rate Florida Jobs

Airport Operations Florida (Tourist Destination)

Total Passengers Tickets to Florida


March 2016
8170 8,085.98

7870

Thousands of People
March 2016
8,053.30

7570

Feb 2010
7,129.30
7270

Feb 2010
6,988.57
6970
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

FL SOE FL EMPLOYMENT

Florida was in a recession for 35 months and the


state of the economy dipped by 15.7%
2550
Feb 07
2,474.40
2500

2450

2400

Thousands of People
2350 July 07
2,428.20

2300
Feb 10
2250 2,183.80

2200

2150
Feb 10
2,142.73
2100
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15

MIAMI SOE MIAMI EMPLOYMENT

The Miami State of the Economy saw a drop of


15.5% and a recession that lasted 3 years
Miami SOE Nowcasted
1

0.8

March 2016
0.6 0.28% Growth
Growth Rate

March 2015
0.22% Growth
0.4

0.2

0 Dec 2015
-0.11% Growth

-0.2
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
Miami LSOE Nowcasted
3

2.5 April 2015 - Sept 2015


2.08% Growth

April 2016 - Sept 2016


2
Growth Rate

1.61% Growth

1.5

0.5

0
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
Miami Nowcasted Economic Downturn Index
0.6 50%

0.45 40%
Growth Rate

0.3 30%

0.15 20%

0 10%
2.72%
0.96%

-0.15 0%
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

Probability of Downturn Miami SOE


Orlando
State of the Economy
Index

Available Seat-Miles
Nonfarm Employment Professional & Business Wages
Revenue Passenger-Miles
Financial Employment Service Employment
Orlando SOE Rescaled to Nonfarm Employment

1150

1100
Feb 2008
Thousands of People Mar 2008 1,086.60
1,055.80
1050

1000

July 2009
950 986.07 Dec 2009
983.50

900

850
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Orlando SOE rescaled Nonfarmemp

Orlandos recession was by the far the shortest and least severe recession
The recession only lasted 16 months and the state of the economy dipped by only
7.1%
Tampa
State of the Economy Index

Nonfarm Employment
S&P Case-Shiller Housing Domestic Passengers
Retail Employment Index
Financial Employment
Tampa SOE Rescaled to Nonfarm Employment
1300
Mar 2007
1,262.51
June 2007
1250 1,237.40

Thousands of People
1200

1150 Jan 2010


1,097.60

1100

Mar 2010
1,076.40
1050
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Tampa SOE rescaled Tampa Nonfarm

Tampa MSA was the most significantly affected region during the
recession
The Tampa State of the Economy experienced a 3 year recession
and a drop of 17.3%
= + +

Dynamic
Factor t = 1 1 +
Model
st = + 1 st + t
Index Created Using Dynamic Factor Model

= + +

Each input () variables movement is driven by the


common factor ( )
() represents the portion movement in the input that is
driven by the common factor ( )
() represents the average of the input () through out all
time periods
represents the movement of the input variable not
explained by the common factor
Index Created Using Dynamic Factor Model

t = 1 1 +

() refers to the movements of () that is not captured by


the common factor
The unique variances can change through time

( ) represents the movement in not explained by past


values of
The evolving unique variances are modeled as a stationary,
mean zero, autoregressive stochastic processes
Index Created Using Dynamic Factor Model

st = + st1 + t

st represents the state of the economy (common factor)

() represents the average state of the economy through all time


periods
State of the economy evolves through time

The dynamics of the change in the state of the economy is modeled


as a stationary autoregressive process
Kalman Filter Used to Fit State of Economy
Observable Xt Predicted St

St
Kalman Filter Used to Fit State of Economy
Observable Xt Predicted St

St

Xt - St

Xt
Kalman Filter Used to Fit State of Economy
Observable Xt Predicted St

St

Kt (Xt St)

Xt - St

St+1

Xt