The US economy continues to show signs of stabilizing after last year’s second-half slowdown. In addition, revised projections for the business cycle trend hint at the possibility that growth is rebounding in early 2020. Although an upbeat outlook for this year remains tentative, today’s forward review points to a mildly stronger output for the US in the first quarter.
Before we get to the forecast let’s review the actual data that profiles the trend through last month. In the realm of what’s highly probably, a broad-based profile of key economic indicators continues to show that the recent downshift in output has stabilized. That counts as progress relative to previous worries that 2019’s second half slowdown was accelerating.
It’s been clear for several months that the slowdown’s trajectory was leveling off. Last month, for example, The Capital Spectator advised that “there are more signs that the slowdown of late has run its course.” The analysis still holds today, based on analysis of published numbers that track the economy through December, as shown in the table below. (For a more comprehensive review of the macro trend with weekly updates see The US Business Cycle Risk Report.)
Aggregating the data in the table above via a pair of proprietary business-cycle benchmarks points to a mild uptick in the macro trend. The Economic Momentum Index (EMI) and the Economic Trend Index (ETI) bounced slightly in December. Although both benchmarks have declined substantially relative to recent history, there are nascent signs that the slide is over. Even after the recent slowdown, ETI and EMI have remained above their respective tipping points that mark recession (50% for ETI and 0% for EMI). Meanwhile, near-term projections for ETI (shown below) suggest that these indicators are on track to turn mildly higher through February. (For details on the design and interpretation of ETI and EMI, see my book on monitoring the business cycle.)
The bottom line: recession risk was low through December. The methodology is based on translating ETI’s historical values into recession-risk probabilities with a probit model. Analysis through this lens indicates a roughly 4% probability that NBER would eventually declare December as the start of a new recession.
Note, too, that a probit-model reading of EMI also shows a relatively low probability (~6%) that the economy was contracting last month.
Now let’s turn to the near-term future and consider how ETI may evolve as new data is published. One way to project values for this index is with an econometric technique known as an autoregressive integrated moving average (ARIMA) model, based on default calculations via the “forecast” package in R. The ARIMA model calculates the missing data points for each indicator for each month — in this case through February 2020. (Note that October 2019 is currently the latest month with a complete set of published data for ETI.) Based on today’s projections, ETI is expected to rise slightly for the December-through-February period. The expected increase is mild and contingent on incoming data, but for the moment it appears that the US macro trend is ticking up. As a result, today’s estimates suggest that the economic trend is stabilizing/strengthening and will remain modestly above the critical 50% mark. A reading below 50% would indicate that NBER is likely to declare a month as the start of a recession.
Forecasts are always suspect, but recent projections of ETI for the near-term future have proven to be reliable guesstimates vs. the full set of published numbers that followed. That’s not surprising, given ETI’s design to capture the broad trend based across multiple indicators. Predicting individual components in isolation, by contrast, is subject to greater uncertainty. The assumption here is that while any one forecast for a given indicator will likely be wrong, the errors may cancel out to some degree by aggregating a broad set of predictions. That’s a reasonable view, based on the generally accurate historical record for the ETI forecasts in recent years.
The current projections (the four black dots in the chart immediately above) suggest that the economy will continue to expand through next month, albeit at a relatively slow pace. The chart also shows the range of vintage ETI projections published on these pages in previous months (blue bars), which you can compare with the actual data (red dots) that followed, based on the current list of published numbers.
For more perspective on the track record of the ETI forecasts, here are the vintage projections for the past three months:
Note: ETI is a diffusion index (i.e., an index that tracks the proportion of components with positive values) for the 14 leading/coincident indicators listed in the table above. ETI values reflect the 3-month average of the transformation rules defined in the table. EMI measures the same set of indicators/transformation rules based on the 3-month average of the median monthly percentage change for the 14 indicators. For purposes of filling in the missing data points in recent history and projecting ETI and EMI values, the missing data points are estimated with an ARIMA model.