Pedro Silos and Diego Vilán
Economic Review, Vol. 92, No. 3, 2007
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Although each of the six southeastern U.S. states within the Sixth Federal Reserve District has unique economic characteristics, these states' business cycles also tend to move together. Currently, no single economic indicator exists for the region's economy.
This article outlines and estimates a model of the Sixth Federal Reserve District economy that provides a single economic indicator. The model assumes that the region's economic activity—measured by a large set of time series of employment, construction, earnings, and sales tax revenues—is driven by an unobserved common factor. The model incorporates disaggregated information for each state into a large model to derive a common component.
Understanding the dynamics behind this common factor will help academics, policymakers, and businesspeople better diagnose and forecast the region's economic condition. Having a single economic indicator for the region will also allow for simpler and faster interpretation of various (sometimes contradictory) economic signals and make comparisons with the nation's and other region's economies easier.
Comparing their latent common factor model with the current practice of averaging individual states' coincident indicators, the authors find that their indicator provides a more reasonable assessment of the impact of large idiosyncratic shocks, such as Hurricane Katrina, than the weighted-average estimates.
July 2007