U.S. Economic Trend Update | 10.8.12

The September data published to date suggests that the U.S. economy continues to grow. The expansion remains sluggish, but it’s still growth. Of the eight September indicators published so far for The Capital Spectator Economic Trend Index (CS-ETI), six are trending positive. That implies that recession risk was still low last month. But the reading is based on incomplete numbers. When the remaining indicators for CS-ETI are updated for September, we’ll have a clearer picture of the broad economic trend. For now, the signs look encouraging. One of September’s indicators—the ISM Manufacturing Index—turned positive for the first time since May, as we discussed last week. With that change for the better, and no reversal of fortunes so far in the other indicators that have been updated, September’s profile is slightly brighter than August’s. But with a half-dozen September updates yet to come, it’s best to reserve judgment in the current environment.

Here’s how the indicators stack up so far:
Taking the 3-month average of these indicators and tracking the changes through time continues to suggest that the economy’s forward momentum is still strong enough to keep a new recession at bay. CS-ETI for September is currently at 74.3%. In other words, 74.3% of CS-ETI’s indicators are trending positive, based on available data so far. A drop below 60% would be a warning sign, and falling under 50% would indicate that a new recession is a virtual certainty. The good news for the moment is that we’re well above those levels. One area for concern is the fact that CS-ETI’s 3-month moving average has been falling for four straight months. The decline remains moderate, however, and it’s still well within the historical range associated with growth.

For some perspective on how CS-ETI may evolve in the immediate future, let’s turn to ARIMA estimates for each of the indicators and then aggregate the individual predictions for some guidance on the near-term outlook. 1 Any one forecast is likely to suffer error, of course, but predicting all the indicators in a robust econometric framework should minimize the risk a bit. Using the ARIMA estimates to fill in the missing numbers tells us that CS-ETI for September will more or less hold steady in the 75% range and October’s reading will rise slightly to around 79%.

Today’s October’s ARIMA estimates (red boxes in chart above) represent an improvement from our previous October outlook (published on September 28). The uptick in the October estimate is primarily due to the revised ARIMA forecast that expects the credit spread to turn favorable this month for the first time in over a year. The actual data for the credit spread for the first week of October supports this view. According to the ARIMA estimate, more of the same is coming and the corporate spread will close out the month by posting a year-over-year decline, which we haven’t seen for over a year (based on average monthly data). A decline in the credit spread implies that the market anticipates a relatively favorable economic climate. By contrast, a widening in this spread suggests that market sentiment sees trouble on the macro horizon.
Overall, the economic trend for September remains positive and the outlook for the immediate future suggests that the incoming data will paint a similar profile. As such, recession risk still looks low, based on a broad reading of the economic and financial indicators to date.

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1. The ARIMA forecasts are calculated in R software, using Professor Rob Hyndman’s “forecast” package, which optimizes the model’s parameters based on each data set’s historical record. ^