REVEALED: The best indicator of the US economy

The Philadelphia Federal Reserve's index of manufacturing activity is the best gauge of economic growth.

In their US Economics Weekly note, Bank of America Merrill Lynch (BAML) economists highlight recent research that examines which indicators are best for "nowcasting" models of Gross Domestic Product, the quarterly arbiter of economic growth.

To determine this, the researchers created real-time "nowcasting" models that gauged the importance of each indicator to show their "intrinsic" value in measuring economic growth.

The factors that determined their value were:

• Timeliness, or how quickly it is released in the data flow. This was the most important.
• Revision noise, or whether it is adjusted multiple times after the fact.
• Relation to fundamentals, or how much the data point tells us about the economy.

Based on these criteria, BAML wrote (emphasis added:)

"Table 1 shows the top 10 out of 36 indicators in terms of their intrinsic value in nowcasting GDP. The results are striking. The most useful indicators in nowcasting are not the big macro numbers, but rather secondary indicators that are released in a very timely manner. Thus the top three indicators are all survey- based measures that are released before the end of the reference month they are measuring-the Philadelphia Fed Index, the preliminary UM sentiment index and the Chicago PMI. The mighty payroll report is only fifth on the list."

The research also found that the jobs report was the top market-moving indicator, followed by retail sales.

But for forecasting whether the economy actually grew or not, look to the Philadelphia Fed index.

Via the Philly Fed, this is a quick description of what the monthly manufacturing business outlook survey includes: "Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received."

Here's a 20-year look at the indicator:

And with the index at the top, here's the full list via BAML.