THE A.D.S. BUSINESS CONDITIONS INDEX ROLLS OVER
The new indicators just keep popping up all over the place. In a great interview with James Montier at Simoleon Sense we discover Montier’s favorite indicator, the ADS Business Conditions Index:
“1. Tell us how you look at cycles. Are there any indicators or measurements you rely on?
James Montier: Personally I’ve never really found it that tricky to know where we are in a cycle. There are a lot of indicators that gauge exactly that sort of thing from the ISM to the ECRI measures. The Philly Fed have a good (by which I mean timely) index called the ADS measure which tracks where we are in real time.”
I had never heard of this indicator so I tracked it down at the Philly Fed’s website to see what it was telling us. Apparently, business conditions have started to contract again after a sharp rebound in 2009 and leveling off in recent months. This one might be worth bookmarking. An explanation of the index methodology follows:
“The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high frequency. Its underlying economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data. Both the ADS index and this web page are updated as data on the index’s underlying components are released.
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.”
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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12 Comments
“Apparently, business conditions have started to contract again after a sharp rebound in 2009″
tpc you omitted the following from the philly fed (must have been an oversight):
“The vertical lines on the figure provide information as to which indicators are available for which dates. For dates to the left of the left line, the ADS index is based on observed data for all six underlying indicators. For dates between the left and right lines, the ADS index is based on at least two monthly indicators (typically employment and industrial production) and initial jobless claims. For dates to the right of the right line, the ADS index is based on initial jobless claims and possibly one monthly indicator.”
so the most recent info is based upon two or one indicators while almost all of the historical info is based on 6 indicators…i wonder if these two readings on the same graph are compatible.
oh, interesting, the most recent data is based on employment and industrial production…which have been improved as compared to recent historical data..which i guess means that when the philly fed final gets round to pulling the other 4 readings into the recent data, assuming these data points have not deteriorated (no one knows since the fed is still pulling this data), the graph will be readjusted upwards significantly.
talking your book again mr tpc
You have an interesting perspective on the world Chris. I am not sure how cutting and pasting someone’s indicator is “talking your book”, but I guess I do have a disproportionate number of bearish stories on the site today.
Personally, I just think the risks are glaring right now and most bulls are whistling past the graveyard. I am just a risk manager, not a perma-bull or perma-bear so don’t hold my biases against me….
i like you tpc and i love your site.
i say you are talking your book because the graph is hugely misleading, as the recent downslope (right of the right line) will likely be soon adjusted upward when the additional 4 data points are collected and graphed (because, again, the two most recent data points that are graphed right of the right line we already now know to be much improved over historical)…perhaps you missed this point, but as i see this graph, only info to the left of the left line can really be taken into account…so that the graph (at least the portion to the right of the left line) doesnt lend credence to your claim of worsening conditions (unless you just wanted to talk a negative book).
i am a risk manager too…for my own account. i do this by reading the other side (and your blog is the most intelligent negative (mostly) presentation i can find), and by writing covered calls and getting stopped out more than i like.
you do seem to have a fair number of cheerleaders on this site…i sure hope they are not all georgetown bball fans because i am only saving up a good raz for a first round exit…;>)
Am I reading this correctly? Did you really just insult Gtown? We pulled Syracuse in the second round of the Big East tourney. Playing at MSG I fully expect to get clobbered.
I am calling sweet 16 in the tourney though. We’re not deep enough to make a run at the final four though.
st johns destroys uconn by over 20…didnt see that one coming, at least not from the johnnies; i would take the female over the male huskies in a dogfight.
Gtown did do well in the THIRD game of the year against SU. At least we will be rested for the final four. (Yes, I’m knocking on wood right now)… Those Patrick Ewing rivalry years…
Leslie
good data catch, chris.
also interesting — .pdf of ADS back to 1960.
Hardley the “Definitive” Indicator
The govrnments reports are “Revised” yearly and monthly– these “after the fact” benchmark revisions have an impact on this indicator.
Value to trader—worthless.
Value to investor—useless.
Do I believe the govrnment reports
That be a ” negatory good buddy “
Indirect investment is the key to all this. Watch the secret fed throwing funds overseas and that will show the correlation.
From various of those who deal with these central banks, you will see certain reinvestment from these same areas. No need to audit and out the fed’s secrets.
Do as I did, follow the money. By the way, I did get that report into the official senate finance committee records too…it’s still causing problems.
Asset fluctuation reports of central banks will show everything one needs to know about the ring around the rosy BS ‘they’ are pulling.
Fed sends money, foreign feds loan, and these buy US debts.
Simple enough?
I recommend 40 – 60% assets in ‘direct’ commodity- those that are and will be in demand, metals, oil, food are the top three.
As an armchair economist I am far more interested in what will happen next. The graph shows what happened in 2008 and 2009, but not how the trend is going. My experience with business (vis books) is that there are bookshops going under because of lack of sales, following the trend of falling rent values in housing. It does not take a rocket scientist to figure out that the consumers’ interest in avoiding credit is to blame, and as long as the credit lenders continue to gouge interest and other extraneous fees out of its good debtors, no one is going to take out another direct investment loan anytime soon under the current conditions. By the same token, the banks are not willing to relax their hold over liguidity, so those already in debt are not able to get themselves out by consolidating and paying off the principal. What we have here is failure to communicate. I will be glad when the legislation designed to correct the imbalance does so, and the economy can get back to some degree of normalcy.
Sorry I am a small timer but I believe little in the way of information published from the US government. There are just way to many examples of government, wholesale misrepresentation of so called ‘government data’. Even unemployment is so manipulated as to misrepresent real unemployment by as much as 30% IMHO and is consistently reassessed correctly after the news media is not longer paying attention to old figures. I abhor more government but how about an application of Sarbanes-Oxley to government employees and elected officials.
You lie and we fine you; you lie big enough and you got to jail.
But thanks for the website.
I was told that this was a very useful, realtime indicator. However, reading the fine print, I see that is not the case at all:
“The vertical lines on the figure provide information as to which indicators are available for which dates. For dates to the left of the left line, the ADS index is based on observed data for all six underlying indicators. For dates between the left and right lines, the ADS index is based on at least two monthly indicators (typically[?] employment and industrial production) and initial jobless claims. For dates to the right of the right line, the ADS
index is based on initial jobless claims and possibly[?] one monthly indicator.”
reminds me of pro-forma accounting statements; i.e., speculation promising to be adjusted later
too bad this doesn’t plot entire history for the 1-indicator, 2-indicator & 6-indicator curves; THAT would be interesting
what use is a control indicator if variance estimates are not supplied as well? Only as good as guesstimates plus or minus reality! Why bother?
We actually run our country this way? Advise our economic policy this way? Remind me NEVER to allow the Fed to manage a nuclear power plant!