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April 1990, Vol. 113, No. 4
Diffusion indexes: an economic barometer
Patricia M Getz and Mark Ulmer
The Bureau of Labor Statistics has improved the diffusion index of employment produced as part of the Bureau's Current Employment Statistics program. The old diffusion index, which included 185 industries, was replaced with a broader-based index, with 349 component industries.1 This expanded index, which covers all nonagricultural industries, is supplemented by a new 141-industry diffusion index for manufacturing. Both diffusion indexes of employment are published each month in table 18 of the Current Labor Statistics section of the Monthly Labor Review.
A diffusion index is a measure of the dispersion of change. A diffusion index of employment provides insight into the breadth of employment change, which can be important in assessing overall economic trends. For example, increases of similar magnitude in total employment may be caused by growth in a few industries or growth in many industries. A sharp overall employment increase caused by increases in only a few industries can have different economic and policy implications than one caused by more widespread increases. The new diffusion indexes for employment change improve the potential for analysis of employment trends because they provide a broader-based measure for all private nonagricultural industries and a separate measure for the cyclically sensitive manufacturing sector.
The previously published index was based on the most comprehensive employment data available at the time of its introduction in December 1974. The component industries were, for the most part, 3-digit Standard Industrial Classification (SIC) levels in manufacturing and the less detailed 2-digit SIC levels for other industry divisions. As a result, manufacturing industries had a disproportionately large representation in the index. However, because of the expansion of data for the service-producing sector in recent years, 3-digit SIC estimates in all industry divisions now are available. This has allowed employment diffusion index computation to "catch up" with service sector expansion and to be more analytically useful than it had been. Nonetheless, it is important to note that the present SIC structure still provides more detail for manufacturing than for service sector industries. Consequently, the 349-industry index still gives greater weight to employment changes in manufacturing than to those in services.
This excerpt is from an article published in the April 1990 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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1 Patricia M. Getz, "Introduction of New Diffusion Indexes," Employment and Earnings, February 1989, pp. 7-8.
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