Indicators Final Power Point Slide

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

Goals
Goals
Create FL & MSA State of the Economy Indices
Goals
Forecast FL & MSA State of the Economy Indices
Goals
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

Economy Index
Nonfarm Employment
Retail Employment Unemployment Wages
Tourism
Real Estate Employment Rate

Economy Index
Nonfarm Employment
Total Airline Passengers
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


Economy Index
Nonfarm Employment
Total Airline Passengers
Total Aircraft Operations Rate
Real Estate Employment
St
X1 X2 X3 X4
Index Created Using
Dynamic Equation 1
Factor
Model Equation 2
Index Created Using
= State of the Economy

Growth Rate
= + +
Dynamic
Factor
Model Equation 2
Index Created Using
= State of the Economy

Growth Rate
= + +
Dynamic = Macro Variables
Factor Growth Rate
Model Equation 2
Index Created Using
= + +
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
FL SOE FL EMPLOYMENT
Florida State of the Economy Index Coincident with Employment
8170
Correlation = 0.89
7870
Thousands of People
7570
7270
6970
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
Creation of Miami
State of the Economy Index
Miami State of the
Economy Index
Labor Market Home Price Wages

Tourism
Index
Creation of Miami
Miami State of the
Economy Index
Nonfarm Employment
Home Price Wages
Retail Employment Tourism
Index
Financial Employment
Creation of Miami
Miami State of the
Economy Index
Nonfarm Employment
Aircraft Seats Per Mile Home Price
Retail Employment Wages
Revenue Passenger-Miles Index
Miami
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
0.8
0.4
Percent Change
0
Dec 2015
-0.11% Growth
-0.4
-0.8
-1.2
Miami's SOE
Forecasting
Current
Index
Mar-15
Jul-15 Sept-15
Jan-16 Mar-16
Jul-16 Sept-16Jan-17

Forecasting
Growth
?
Current 6 Months
Index from Current
Index
Mar-15
Jul-15 Sept-15
Jan-16 Mar-16

Forecasting
Leading
State of the
Economy Index
Growth
?
Current 6 Months
Index from Current
Index
Mar-15
Jul-15 Sept-15
Jan-16 Mar-16

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
Consumer
Sentiment Index
FL Stock Index
Interest Rate
Spread
Variable Selection
Methodology
Leading Indicators
Manufacturing
Delivery Times
New Private
Housing Permits
Unemployment
Consumer
Sentiment Index
FL Stock Index
Interest Rate
Spread
Variable Selection
Methodology
Leading Indicators
Manufacturing
Delivery Times
New Private
Housing Permits
Unemployment
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
6 Month Growth
t t+6
6 Month Growth
Expected
t t+6
6 Month Growth
Expected
t t+6
6 Month Growth
Expected
Actual
t t+6
6 Month Growth
Expected
Actual
t t+6
6 Month Growth
Expected
Actual
t t+6
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

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

Miami Leading State of the Economy Index Fits Actual Six Month Growth
4
2
6 Month Growth Rate
Correlation = 0.94
-2
-4
-6

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
-0.1
-0.3
-0.5
-0.7
-0.9
-1.1
Classifying Economic Downturn
0.3
4 Months
0.1
DOWNTURN
-0.1
-0.3
-0.5
-0.7
-0.9
-1.1
Economic Downturn Index
Created
Probability of Downturn = ( Leading SOE )

Created
Probability of Downturn = ( Leading SOE )
(1,0) (Continuous Variable)

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

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%
7900

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

2420
60%
2370
2320
40%
2270
2220
20%
2170
0% 2120
PROBABILITY FSOE
Miami Economic Downturn Index
100% 2570
2520
80%
2470

2420
60%
2370 Dec 2015
Probability of
2320
40%
Downturn 6%
2270
2220
20%
2170
0% 2120
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
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
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
0.5
0.4
Growth Rate
0.3
0.2
0.1
0
0.5
0.4
Growth Rate
0.3
0.2
0.1
0
0.5 July - Dec 2016

0.5% Growth
0.4
Growth Rate
0.3
0.2
0.1
0
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:

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June:

Actual Nonfarm Employment June: 9,800 Jobs

6 Month Nonfarm Employment Estimate July December 2016:

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
Forecasted State of the Economy Index for: Florida & MSAs

What We Have Done
Gave Probability of Economic Downturn for: Florida & MSAs

What We Have Done
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
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
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
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
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%
Probability of Downturn Miami SOE

Orlando
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
Nonfarm Employment
S&P Case-Shiller Housing Domestic Passengers
Retail Employment Index
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
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
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
St
Xt - St
Xt
St
Kt (Xt St)
Xt - St
St+1
Xt

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STATE OF THE

Nonfarm Employment Average Hours Weekly Manufacturing

Wages Unemployment Rate

State of the Economy

State of the Economy

Create FL & MSA State of the Economy Indices

Create FL & MSA State of the Economy Indices

Forecast FL & MSA State of the Economy Indices

Create FL & MSA State of the Economy Indices

Forecast FL & MSA State of the Economy Indices

Create FL & MSA Economic Downturn Indices

Florida State of the

Labor Market Unemployment Wages

Florida State of the

Florida State of the

James Stock, Harvard University and Mark Watson, Princeton University

Unobserved Factor Expresses Common Relationship Among Observable Variables

Florida State of the

= State of the Economy

= State of the Economy

Labor Market Home Price Wages

State of the Economy Index

State of the Economy Index

State of the Economy Index

VAR has Parameter Restrictions

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate

Miami Leading State

Miami State of the New Private Interest Rate Miami Stock

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate

Forecasted 6 Months Growth Rate Actual 6 Months Growth Rate

Probability of Downturn = ( Leading SOE )

Probability of Downturn = ( Leading SOE )

(1,0) (Continuous Variable)

Line goes below 0 and above 1 Represents inverse cumulative probability

State of the Economy Index

State of the Economy Index

State of the Economy Index

State of the Economy Index

March April May June July

Most Recent Today

Forecasting Lagged Values to get Current Values

Observe State of the Economy Sooner

Measures Volume of Searches for Categorized Queries

Compacted to Monthly and Seasonally Adjusted

Hal Varian, Chief Economist at Google

0.5 July - Dec 2016

ACTUAL PROBABILITY NOWCASTED PROBABILITY

Our Nonfarm Employment June Estimate:

Our Nonfarm Employment June Estimate: 10,000 Jobs

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June:

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs

6 Month Nonfarm Employment Estimate July December 2016:

Our Nonfarm Employment June Estimate: 10,000 Jobs

Actual Nonfarm Employment June: 9,800 Jobs

6 Month Nonfarm Employment Estimate July December 2016:

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

Florida Leading State of the Economy Index: 0.5% Growth

Florida Economic Downturn Index: 27% Probability of