Those involved in commerce, industry and policy-making in Arizona are fortunate to have a reliable and timely forward-looking index that gauges the cycles of the local economy. The Arizona Business Conditions Index (formerly the Arizona Purchasing Managers Index) is released during the first week of each month. Covering business conditions in the month immediately prior to release, the Index is the timeliest indicator of up-coming changes in the local economy. Since its inception in 1962, the Index has correctly warned, with about a four-month lead, of all upcoming recessions, including their depth, and has also shown the path of normal cycles of local economic activity. Included in the release of the overall Index is a Price Index, which reveals the direction of price pressure in the local economy.

The Arizona Business Conditions Index is a compilation of six sub-indices, based on a monthly survey of members of the National Association of Purchasing Managers (now the Institute of Supply Management): employment, production, new orders, purchases, purchased materials inventory level and delivery times from suppliers. The value of each of these sub-indices is released along with the overall Index each month and can be used alone or in combination to analyze various aspects of the economy. Calculating a ratio of the production and employment sub-indices, for example, provides a measure of implicit productivity in the state. A rise in the sub-index of delivery times from suppliers indicates that it is taking longer for suppliers to fill their orders, usually a symptom of high demand when compared to supply. The new orders sub-index is particularly useful as a forecasting tool because new orders on the table mean work to come. An increase in the purchased materials inventory sub-index can be a precursor to a cycle in which inventories need to be depleted, especially when constructed as a numerator in a ratio with the new orders sub-index.

All of the sub-indices, the overall Index and the Price Index are diffusion indices. This means that, rather than a measurement of actual levels of economic activity; they are a measurement of increases and decreases. Each component is calculated from data obtained from a survey of the members of Arizona affiliates of the Institute of Supply Management (formerly the National Association of Purchasing Managers). The questions on the survey are asked in a format that requires answers of "higher", "unchanged" or "lower". Then they are tabulated and formed into the index by the JPMorgan Chase Economic Outlook Center at Arizona State University, which also maintains a web site for the information (http://www.cob.asu.edu/seid/eoc/azpmi/). An index reading of over 50 indicates growth in the local economy while a reading below 50 portends a slowdown.

While there are some pitfalls, such as the fact that it gives more lead-time in forecasting an economic slowdown than it does for a recovery, the Arizona Business Conditions Index is a good forecasting tool with a long history. If you would like an in-depth presentation about the Arizona Business Conditions Index and the Arizona economy, please contact the JPMorgan Chase Economic Outlook Center at (480) 965-5543 (http://wpcarey.asu.edu/seid/eoc/).