Taking the Economic Pulse

The hope is that the first “principal component” explains the bulk of the variation in the data. [...] I then present the case for principal components analysis being a statistical improvement in calculating the diffusion index.1 The final part of this section discusses how the potential arbitrariness of industry data breakdowns in the unweighted diffusion index can be avoided by continuing to follow the Cross (2004) methodology while looking only at the subset of all industries measured by Statist [...] A quarterly version of the unsmoothed index (see Cross and Bergevin 2012) can be calculated as well by averaging the values for the diffusion index across the three months of the relevant quarter. [...] The “Baseline Version” In this paper, I use the chain-weighted5 sectoral data by North American Industrial Classification System (NAICS) code, at the three-digit level.6 One major advantage in using these more recent data over the data in Cross (2004) is that the breakdown of industries is essentially one-third goods and two-thirds services, reflecting the true size of these sectors in the overall [...] I run the results for the unweighted indices with both a threshold of 0.05 and no threshold at all, and found no difference between these two calculations, either regarding the quarters in which a majority of industries are contracting, or in the average value of the diffusion indices.