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The U of I Flash Index - History and Background

The U of I Flash Index was created in 1995 at the Institute of Government and Public Affairs at the University of Illinois to provide an instantaneous reading of the performance of the Illinois economy. The index has become the most widely used monthly economic indicator in Illinois, appearing in many newspapers and on broadcast news outlets. It has been reproduced in economic data provided by the state’s Department of Commerce and Economic Opportunity and the Illinois State Chamber of Commerce as well as more specialized sources such as the McGraw-Hill Midwest construction report.

Ideally, indices are designed to distill a great deal of valuable information into one concise measure. Exactly what goes into the index may be of little interest. Bismarck’s oft repeated comment about politics that: “Laws are like sausages, it is better not to see them being made” probably applies to economic indices as well. The construction of an index is part science and part art. It is more than a “black box” process” in which data are inserted into a computer with the index emerging. A number of subjective judgments and adjustments must be made on a continuing basis to deal with specials situations that arise on an almost monthly basis. Some of these will be discussed below.

The adjective “flash” is the key to the U of I Flash Index. It was designed expressly to provide quick reading of how the state’s economy is doing. Other commonly-used measures such as gross state product, industrial production, personal income, and retail sales are not available for 6 months to a year after the period they measure ends. In contrast, the Flash Index is compiled on the first business day of each month using data from the preceding month. Data for the month from the Illinois Department of Revenue are used to provide estimates of economic activity in the state. Individual income tax receipts reflect personal income; corporate receipts are a surrogate for business profits; and sales tax receipts measure retail sales. The reported index is based on 12 months of data with a new month added and one dropped each month. The index is constructed with the reading of 100 the dividing line between expansion and contraction. Consequently, the key focus of the index is not whether it is increasing or decreasing, but whether and how much it is above or below the 100 level.

The tax data must be adjusted for changes in tax rates or changes in rules about the bases of the taxes. An increase in tax receipts resulting from higher tax rates would not reflect true growth in the economy and would have to be appropriately adjusted. Special issues also sometimes arise. For example, in 2000, Commonwealth Edison sold a coal-fired power plant and paid an estimated $200 million to the state in capital gains taxes in March of that year. This extraordinary payment did not reflect an increase in business profits from ongoing activities and thus had to be neutralized for purposes of the Flash Index.

While the Flash Index has only been in existence for about 10 years, the index has been constructed with historic data using the same methodology going back to July 1981. The accompanying graph shows the performance of the index since its inception. Note that the severity of twin recessions in the early 1980s was greater than either of the more recent recessions in 1990 and 2001. The Flash Index can claim an unusual accomplishment. It dipped below 100 in March 2001, well before the events of 9/11 of that year. This was precisely the time that the National Bureau of Economic Research’s Business Cycle Dating Committee (the organization that officially chronicles the business cycle) determined that the 2001 recession began. However, the committee did not make this determination until November 2001, 8 months into the recession.

The Flash Index is valuable for a number of uses, but its findings must be reevaluated when more comprehensive data become available months and sometimes years after the index is released. The Flash Index also does not provide regional information about the state of Illinois. For example, growth cannot be attributed to a particular area such as the Chicago region since the data are not broken down by location. Region-specific data become available much later.

In summary, while the Flash Index does not predict the course of future economic activity, it provides the most current measure of Illinois economic performance and the economy’s performance today is often the best guide available for how the economy will function in the near term.

By J. Fred Giertz

More on the Flash Index

 

Flash Index Title

The State of the Illinois Economy

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