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Blog: Digging into the Diffusion Index

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A week ago, the Labor Department released a strong jobs report -- 203,000 new jobs added in November and the unemployment rate down from 7.3% to 7.0%. Those numbers once again show an economy on a steady path to full recovery, but I was particularly excited about a somewhat obscure data point that gets to the heart of just how broad our recovery has been.

The diffusion index is a measure of how widespread changes in employment are across various industries. Put more simply, it tells us about the breadth of job creation. Component industries are assigned a value of 0, 50 or 100, depending on whether employment in that industry is decreasing, not changing or increasing, respectively. The average across all industries is the diffusion index number. In a given month, if the diffusion index is 50, we know that as many industries gained employment as lost employment. If it's 0, we know all industries saw employment decline. If it's 100, every industry added jobs. As the index moves further away from 50, it tells us how broadly industries are experiencing job loss or job growth.

When the economy was booming in the 1990s, the average* diffusion index was 66.1. By November 2007 -- the month before the start of the Great Recession -- it was down to 55.6. That means a narrow plurality of industries was still adding jobs. In the following months, as the recession began to take its toll on the economy, the index dropped precipitously as job losses spread to a large swath of industries, eventually bottoming out at 17.1 in March 2009. That same month, the manufacturing index fell to a dire 9.3 -- a stark reminder of the severe toll the recession took on American manufacturers.

But November's report is yet more proof we've rebounded. The diffusion index for all industries crossed back over 50 percent in early 2010 and stands today at 63.5, indicating strong and broad job growth across the economy. Manufacturing, among the sectors hardest hit by the recession, jumped to 63.0 from 56.8 last month -- its highest level since March 2012 (74.1). We have plenty more work ahead of us to further broaden and deepen this growth, but the November jobs report is an opportunity to reflect on just how far we've come.


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