Consistent Economic Indexes for the 50 States

Abstract

The views expressed here are those of the author and do not necessarily represent those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. I thank James Stock and Mark Watson for supplying their original GAUSS program to estimate earlier versions of state index models and for suggesting the application of their national model to regions and states. I thank Keith Sill for assistance in applying that program to earlier state models. Alan Clayton-Matthews provided invaluable advice and a C++ program to estimate the current state models. Finally, I thank Jason Novak for excellent research assistance on this project. Any errors are mine alone.

Regional Economic Activity and Stock Returns

“…The economic relevance is defined as the citation share of the state, i.e., the number of counts of the corresponding state divided by the total number of state counts. 4 For the economic activity of the states, I employ the State Coincident Indexes and the State Leading Indexes developed by Crone and Clayton-Matthews (2005) as measures of the current and future economic situation of the U.S. states. Weighting the monthly state activity indexes by the corresponding citation shares produces the contemporaneous and predicted regional economic activity proxy, CREA and PREA, respectively.…”

“…Furthermore, they show that their business cycle indicators have no impact on future firm fundamentals measured on a quarterly frequency, which indicates that the return predictability is purely based on demand shifts for risky assets rather than changes in firms' cash flows. In contrast to the approach pursued by Korniotis and Kumar (2013), I identify all economically relevant states for each company instead of the single headquarter state and combine this data set with comprehensive state indexes developed by Crone and Clayton-Matthews (2005). Interestingly, this novel firm-specific proxy uncovers a clear, positive link between firms' operating performance and the economic activity of their relevant geographic regions.…”

GDP Trend-cycle Decompositions Using State-level Data

“…With respect to the first approach, in which many variables of the same unit of interest provide information about a common cycle, Crone and Clayton-Matthews (2005) describe how to use mixed frequency data from the U.S. states to estimate state-level monthly indexes of economic activity for each state. The setup is the UC model discussed in Watson (1988, 1989).…”

Using state level employment thresholds to explain Okun’s Law

“…The Bureau of Labor Statistics does not produce inflation measures by state but by large metropolitan statistical areas and geographical regions. Instead of attempting to find an appropriate conversion of total personal income for each state we use the economic coincident index produced by the Federal Reserve Bank of Philadelphia, created by Stock and Watson (1989), and applied to states by Crone and Clayton-Matthews (2005). The economic coincident index is produced on a monthly frequency and is constructed to follow the trend for each state's real gross product.…”