Will the US Economy Recover in 2010? A Minimal Spanning Tree Study

TL;DR

This study uses minimal spanning trees to analyze US economic sector correlations from 2000 to 2008, identifying structural patterns linked to economic stability and crises, and suggests signs of recovery in 2009.

Contribution

It introduces a novel MST-based approach to classify US economic states and track recovery signals through sector correlation structures.

Findings

MSTs show core-fringe sector structures consistent over time.

Two MST topologies correlate with economic stability and crises.

Star-like MSTs indicate economic recovery, observed in 2009.

Abstract

We calculated the cross correlations between the half-hourly times series of the ten Dow Jones US economic sectors over the period February 2000 to August 2008, the two-year intervals 2002--2003, 2004--2005, 2008--2009, and also over 11 segments within the present financial crisis, to construct minimal spanning trees (MSTs) of the US economy at the sector level. In all MSTs, a core-fringe structure is found, with consumer goods, consumer services, and the industrials consistently making up the core, and basic materials, oil and gas, healthcare, telecommunications, and utilities residing predominantly on the fringe. More importantly, we find that the MSTs can be classified into two distinct, statistically robust, topologies: (i) star-like, with the industrials at the center, associated with low-volatility economic growth; and (ii) chain-like, associated with high-volatility economic crisis. Finally, we present statistical evidence, based on the emergence of a star-like MST in Sep 2009, and the MST staying robustly star-like throughout the Greek Debt Crisis, that the US economy is on track to a recovery.