The US economy has weathered some turbulence in recent months, including a government shutdown, higher interest rates, and a downturn in the mood among consumers. A subjective interpretation of these and other events suggests trouble for the business cycle, but for the moment that’s still assuming facts not in evidence. Macro risk remains low overall, based on measuring the broad trend via 14 economic and financial indicators. The Economic Trend (ETI) and Momentum indexes (EMI) continue to hover at levels that are well above their respective danger zones—levels that imply that the risk of a new recession was low through October.
One of the exceptions to this otherwise encouraging overview is the rise in oil prices, which have been advancing on a year-over-year basis lately. But the rate of increase has been modest by historical standards. Meanwhile, the latest news of the nuclear agreement with Iran has sent oil prices tumbling on the assumption that global supply will rise in the near term. The decline in consumer sentiment lately is a dark sign, although the upbeat numbers on retail sales last month suggest that spending on Main Street will hold up for the foreseeable future.
Meantime, here’s a closer look at the trend in recent months, according to the various indicators that comprise ETI and EMI:
Reviewing ETI and EMI in historical context shows that both benchmarks remain well above their respective danger zones: 50% for ETI and 0% for EMI. If the indexes fall below their respective tipping points, that would be a sign that recession risk is elevated.
Translating ETI’s historical values into recession-risk probabilities via a probit model also suggests that business cycle risk is low.
For some perspective on how ETI’s values may evolve as new data is published, let’s review projected values for this index with an econometric technique known as an autoregressive integrated moving average (ARIMA) model, based on calculations via the “forecast” package for R, a statistical software environment. The ARIMA model estimates the missing data points for each indicator, for each month through December 2013. (August 2013 is currently the latest month with a complete set of published data). Based on this projection, ETI is expected to remain well above its danger zone in the near term. Forecasts are always suspect, of course, but recent projections of ETI for the near term have proven to be relatively reliable guesstimates vs. the full set of monthly reported numbers that followed. As such, the latest projections (the four yellow bars on the right in the chart below) offer some support for cautious optimism. For comparison, the chart below also includes ARIMA projections published on these pages in previous months, which you can compare with the complete monthly sets of actual data that followed, based on current data (red circles). The assumption here is that while any one forecast is likely to be wrong, the errors may cancel one another out to some degree by aggregating a broad set of forecasts.
For additional context for judging the value of the forecasts, here are previously published ETI and EMI updates for the last three months:
21 Oct 2013
19 Sep 2013
19 Aug 2013