An Economic Indicator for the State of the Economy in the Southeastern U.S.

Abstract

Abstract. A state space model is constructed so that a state variable representing the unobservable state of the economy is estimated from information on new orders, production, employment, supplier delivery time, and finished inventory obtained from the purchasing managers' survey for Georgia. This state variable captures the co-movements of the time series used in its construction and serves as an economic indicator for Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee. Even though this economic indicator is estimated from information from the purchasing managers' survey on manufacturing activity for just Georgia, it produces reasonable forecasts for the real growth rates of the gross domestic products of Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee for 1991 through 2008.(ProQuest: ... denotes formulae omitted.)1. IntroductionStock and Watson (1991 and 1993) have shown how to construct a state space model which can be used to estimate a state variable that captures the co-movements of a set of economic time series. When appropriate time series variables are em-ployed, the estimated state variable for the state space model can be thought of as a measure of the unobservable state of the economy. This study uses information from the purchasing managers' survey of manufacturing activity for the state of Georgia to produce an economic indicator which represents the unobservable state of the economy for the south-eastern U.S. The state variable produced by the state space model for this study is shown to be an eco-nomic indicator for Georgia and all of the states that share a border with Georgia: Alabama, Florida, North Carolina, South Carolina, and Tennessee. Collectively, these states make up the southeastern U.S. The estimated state variable is used to produce forecasts for real growth rates for 1991 through 2012 for these states. Even though the information used to estimate the economic indicator is from the purchasing managers' survey of manufacturing activity for just the state of Georgia, much of the var-iation in the growth rates for the real gross domestic products for Alabama, Florida, Georgia, North Caro-lina, South Carolina, and Tennessee is explained by the estimated state variable from the state space model used in this study. This suggests that region-al purchasing managers' surveys of manufacturing activity for other regions in the U.S. are obtaining information on the state of the economy in a much broader geographic area.The manufacturing sector's sensitivity to eco-nomic shocks and changes in economic conditions provides a valuable link between manufacturing activity and overall economic activity. The manu-facturing sector is an important barometer of overall economic activity because it has a range of upstream and downstream operations and services that sup-port the production and operation of the products produced. Economists recognize it is not only man-ufacturing's direct and indirect contributions to gross domestic product that make the manufactur-ing sector important, but also how quickly and the degree to which the manufacturing sector responds to economic shocks and changes in economic condi-tions. An estimated 66 percent of all variation in gross domestic product is related to changes in the manufacturing sector, and manufacturing changes by an estimated 2.1 times the change in gross do-mestic product (Harris, 1991). Other sectors in the U.S. economy do not experience such sizable swings. The sensitivity of manufacturing to economic shocks and changes in economic conditions gives added validity to the position that data from surveys of manufacturing activity will have the ability to give early warning signals for the economy and to fore-cast future changes in economic activity.In the United States, the grouping of states into regions by the Bureau of Economic Analysis is the most frequently used grouping for economic analy-sis. …