A New Net-Rising Index: the Connecticut Economic Scorecard
I’ve always wanted to learn how to spell Connecticut.
Woody Allen as Ray (Small Town Crooks, 2000)
The Connecticut Economic Scorecard is what is known in the business world as a Net-Rising Index. The underlying query – one surmises – is that it is often difficult to draw conclusive information from multiple sources of information – especially when they are contradictory. How does one make sense of six possibly contradictory indicators? What is one to conclude as to the general sense of the economy if one is to infer information solely from economic indicators that may be conveying contrary information? For example: the February 2023 Initial Claims indicator is worsening whereas weekly Average Hourly Earnings is improving; what of it?
A net-rising index seems to present a clever solution to these contradictory, perhaps perplexing, situations of conflicting signals. Clever because it seems naturally intuitive as to how humans process such contradictory information: we tend to reach for a subjective, average – split-the-difference take on their interpretation.
In a net-rising index, rather than confront the difficulty of interpreting the movements of indicators in levels, we focus attention on the changes in the indicators from period to period. When we know the change taken by each metric, we can then count the proportion of positive and negative changes, and, importantly, the (net) difference between the one and the other.
Thus, we are more inclined to believe that the economy is favorable if four of the six series examined are trending positive. We then ascribe more confidence to the direction of the trend the greater the percentage of the directional counts. Thus, an economy where six out of six (100 percent) of the indicators is positive is greater and more likely to be favorable than an economy with four out of six (67 percent) indicators positive.
The problem (or perhaps, an advantage) is that the focus on counting changes tends to dismiss any information available as to the intensity of a change. In other words, a positive 25 percent change in one indicator counts just as much as a positive 2 percent change in another. The import of this assumption is for another post.
An important caveat: although we are calling the net-rising index intuitive, in reality, most humans exploit the information available in environmental cues (Goldstein & Gigerenzer, 2002); i.e. context matters, to supplement or complement the information available in the net-rising index. Put differently, the index is intuitive; but it is simply one input into the decision-making or interpretation process. And for purposes of the analysis, we often combine the information from the Economic Scorecard with other information, as well as our day-to-day experiences via a formal expert-judgment process.
The CT Economic Scorecard is a Net Rising Index. It is constructed by subtracting the percent of the series that had a Month-to-Month (MTM) percent increase for the current month from the percent of the component series that had a MTM percent-decline in the current month.
If the value of the observed Net-Rising Index is greater than zero (positive), then the percent of series rising exceeds the percent declining. Consistent with our interpretation of the positive outstripping the negatives this would imply that Connecticut’s economic conditions are improving.
Conversely, if the value of the Net-Rising Index is less than zero (negative), then the percent of series declining exceeds the percent of the component series rising and it would indicate that Connecticut’s business conditions are deteriorating.
Last, if the value of the Net Rising Index (Net Rising Index) is zero, then the percent of the series in the Business Scorecard rising is exactly equal to the percent that declined.
The month-to-month change, the counts, and the Diffusion Index - alongside a 6-month moving average to more easily discern the information conveyed - are presented in the Scorecard dashboard.
What of it? Alas, five of the last six months of the Index of the new Connecticut Economic Scorecard have been negative. I don’t know what to make of all the talk recently of the Fed managing a soft landing but what is clear is Connecticut is landing.
arod
Write to me: arodriguez@newhaven.edu