September 18, 2012
U.S. Economic Trend Update | 9.18.12
Several analysts are warning (again) that we’re in a recession now, today, this minute. They may be right, or not. It’s hard to say for sure, of course, because we have minimal economic data about what’s happening now, today, this minute. Septermber's economic profile, in other words, remains a mystery for the most part for a few weeks longer. But we do have most of the data through August, and it’s always worthwhile to review a broad measure of the numbers as a benchmark for thinking about where we've been in the business cycle, and where we seem to be headed.
Tallying up the stats so far suggests that recession risk was still low for August. That’s based on updates for 13 of the 17 indicators that comprise our Economic Trend Index, a collection of leading and coincident variables that have a reasonably good record overall for quantifying the ebb and flow of the business cycle. There are signs of weakening in the last two months, but it’s not yet clear if this is short-term noise or the start of something more ominous. We'll have a better read on what's happening in a few weeks. Meantime, for some perspective of what we know today, let’s turn to the numbers proper.
As the table below shows, the warning signs are still in the minority. Several data points for August are still missing and so it’s possible that the incidence of red ink may rise on the ledger below. But for the moment, the case for arguing that August slipped over the cyclical edge still looks fairly weak.
For a review of how our 17 indicators compare through the decades with the arrival of recessions, consider the next chart, which tracks a 3-month moving average of the monthly data listed in the table above to smooth the short-term volatility. History suggests that when the risk of a new slump is high, the percentage of these indicators trending positive (on a trailing 3-month basis) will be falling persistently. As a rough guide, when we slip under the 60% mark, that’s a strong warning sign; if the tumble takes us below 50%, well, it’s a virtual certainty that a new recession has started.
But with the August reading at roughly 78%, there’s still a fairly large comfort zone for debating if growth is dead. Yes, the August reading is down a bit from July, which is down slightly from June, but it’s premature to assume that the cycle’s fate has been sealed. To be sure, revisions may further lower the readings for July and August. But it's unlikely that we'll see sufficiently negative revisions that show clear signs that a recession started in the recent past.
For some guidance on where we may be going, let’s turn to ARIMA forecasts for each of the 17 indicators and then aggregate the individual predictions for a read on where our trend index may be headed in the near-term future.1 Any one forecast is likely to suffer error, of course, but predicting all 17 indicators in a robust econometric framework will minimize the risk a bit. With that in mind, the next chart suggests that the trend is set to weaken further in the months ahead, if only slightly. That's a sign that we should manage our expectations for the economy, but it's still well short of an argument for expecting the worst.
Deciding if the recent wobbles in the economic trend is a sign of deeper trouble, or just more noise, is still the great unknown at the moment. Some economists insist that the die is cast and so the cycle is destined to fall into darkness. Maybe, but if that’s true we’ll soon see more convincing evidence in the numbers. As usual, a fresh batch of data is on its way. Meantime, there’s still a case for expecting slow growth until the economic and financial indicators tell us otherwise.
Posted by jp at September 18, 2012 4:21 AM