Economic Indicator Roundup: Adding Citigroup Economic Surprise Index – United States

I am slowly building my dashboard of economic indicators that I most regularly follow.  For each, I will try to give you a brief description, the latest reading and what I understand to be its implications.  For simplicity, I will assign each a rating of positive, neutral or negative.  Generally, a “positive” rating is consistent with economic growth that is close to or better than average, enough to sustain good job growth.  Neutral would imply slow or no economic growth but not a recession or worse.  Negative would be indicative of a slowdown or recession.  Additionally, I will highlight the positive ones with a green background and negative ones with red.

Citigroup Economic Surprise Index US (link here)

From the actual description:

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.

Well, that was certainly a mouthful!  Let me break it down for you a little bit in easy-to-understand pieces.

Before most economic reports are released (like the jobs report, retail sales, GDP, etc.), Bloomberg surveys a whole bunch of economists to see what they expect the report will say.  For example, 30 economists might predict the number of jobs added in July.  And their predictions range from 5,000 to 180,000 jobs added, but the one in the middle of that range is the “median” – let’s say in this example it’s 78,000 jobs added.  So, when the actual number is reported, the difference between the actual and that survey median is the “surprise” amount.  If the actual comes in at 100,000 jobs, that’s a positive surprise of 22,000.

They do this for a wide range of economic reports that come in, not just for jobs.  And they do it on a rolling three-month window.  That means that any report that came out more than three months ago is not included in this index.  Furthermore, the “time decay function” just means that they give more weight to the more recent “surprise” values than the ones that are older.  This is consistent with the “limited memory of market” – meaning, investors take a “what have you done for me lately” attitude with a lot of these reports, usually acting on the most recent ones.

In theory a value of zero indicates that economic reports are basically coming in right where economists predicted.  Values above zero indicate that reports are coming in better than expected, and negative values indicate that things are generally worse than expected.  It is updated daily.

Latest Reading: -96.1 on July 14, 2011.  This is remarkably low, the lowest this index has been since Jan 2009, shortly after the financial crisis unfolded.  The recent low came on June 6 with a reading of -112, and although things picked it up from there, they have been slipping again since July 7.  The last time this index was above zero was on April 29 of this year.

Economic Indicator Roundup (July 14, 2011)