Aruoba Diebold Scotti Business Conditions Index (ADS)

The ADS Index is one of several macro-level indicators tracking the overall health of the US economy.  This index is a diffusion of 6 economic components:  Weekly initial jobless claims; monthly payroll employment; industrial production; personal income less transfer payments; manufacturing and trade sales; and quarterly real GDP.  The ADS index is updated in almost real-time with “high-frequency” economic data.

The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions. The ADS index may be used to compare business conditions at different times. A value of -3.0, for example, would indicate business conditions significantly worse than at any time in either the 1990-91 or the 2001 recession, during which the ADS index never dropped below -2.0.

Below are the 9 year and 18 year ADS Index charts.  The gray bands represent recessions.  A primary observation in the historical charts is that weakness in the ADS index precedes a possible economic contraction by almost a year.  Another observation is how the ADS Index “stair-stepped” down to negative 1.0 in Q208, telling us that the economy was getting progressively weaker, and was a signal about 4 months prior to the Oct 2008 market crash.

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