In econometrics, a dynamic factor (also known as a diffusion index) is a series which measures the co-movement of many time series. It is used in certain macroeconomic models.

A diffusion index is intended to indicate

• the changes of the fraction of economic data time series which increase or decrease over the selected time interval,
• an increase or decrease in future economic activity,
• provide some correlation to the business sentiment of companies.

Formally

${\displaystyle X_{t}=\Lambda _{t}F_{t}+e_{t},}$

where ${\displaystyle F_{t}=(f_{t}^{\top },\dots ,f_{t-q}^{\top })}$ is the vector of lagged factors of the variables in the ${\displaystyle T\times N}$ matrix ${\displaystyle X_{t}}$ (T is the number of observations and N is the number of variables), ${\displaystyle \Lambda _{t}}$ are the factor loadings, and ${\displaystyle e_{t}}$ is the factor error.