Economic worries for the global economy are again taking a toll on sentiment these days, but the US macro trend shows few signs of stress, based on data through September. It remains to be seen if the resiliency holds up in the October profile. An early clue arrives on Thursday, with the initial estimate of manufacturing activity for the US via Markit’s business survey release for October. Meantime, the rear-view mirror continues to show a considerable degree of positive momentum for the US overall, based on the September update of a diversified set of 14 economic and financial indicators.
Using a methodology outlined in Nowcasting The Business Cycle: A Practical Guide For Spotting Business Cycle Peaks, a broad review of economic and financial trends suggests that recession risk remains low at the moment. The Economic Trend and Momentum indices (ETI and EMI, respectively) are still at levels that equate with expansion. The current September profile of published indicators so far (12 of 14 data sets) for ETI and EMI reflect solidly positive trends. As a result, the bias for growth still looks strong.
For deeper perspective on how the indicators are evolving, let’s review the numbers, starting with a summary of ETI and EMI’s individual components:
Aggregating the data into business cycle indexes continues to show a positive trend. Reviewing the latest numbers for ETI and EMI finds that both benchmarks are well above their respective danger zones: 50% for ETI and 0% for EMI. When the indexes fall below those tipping points, we’ll have clear warning signs that recession risk is elevated. For now, however, there’s still a comfortable margin of safety between current values for September (97.6% for ETI and 10.3% for EMI) and the danger zones.
Translating ETI’s historical values into recession-risk probabilities via a probit model also suggests that business cycle risk remains low. To be precise, the data implies that the odds are virtually nil that the National Bureau of Economic Research (NBER)–the official arbiter of business cycle dates—will declare last month as the start of a new recession.
Next, let’s consider how ETI’s values may evolve as new data is published in the near future. One way to estimate expected values for this index is 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 calculates the missing data points for each indicator, for each month through November 2014. (July 2014 is currently the latest month with a complete set of published data). Based on today’s projections, 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 future term have proven to be relatively reliable guesstimates vs. the full set of published numbers that followed. That’s not surprising, given the broadly diversified nature of ETI. Predicting individual components, by contrast, is prone to far more uncertainty in the short run. As such, the latest projections (the four bars with black horizontal stripes on the right in the chart above) offer support for cautious optimism. The chart above also includes the vintage ETI 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 numbers (red circles). The assumption here is that while any one forecast for a given indicator is likely to be wrong, the errors may cancel one another out to some degree by aggregating a broad set of predictions. The historical record for this forecast methodology suggests that’s a reasonable assumption for peeking into the near-term future.
For additional perspective on judging the value of the forecasts via the historical record, here are the previous updates for the last three months: