“New Financial Conditions Index”

I ran across the following paper titled “Financial Conditions Indexes: A Fresh Look after the Financial Crisis” (pdf) dated February 22, 2010.

This paper discusses and explains this new attempt to create a “financial conditions index” that will accurately predict economic activity.

From the abstract: “As of the end of 2009, our FCI showed financial
conditions at somewhat worse-than-normal levels. The main reason is that quantitative credit measures (e.g. asset-backed securities issuance) remain very weak, especially once we control for past economic growth. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.”

Here is a chart of the “New FCI” from page 43 of the report:

I will reserve comment on this “New FCI” as I have yet to thoroughly review the paper and the “New FCI” methodology.

However, I find it interesting and hope to include it with the other financial and economic indicators I periodically (the last being the January 11 post) review.

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SPX at 1143.84 as this post is written