“It’s not the healthiest recovery,” but “we believe that we have avoided the worst, and the economic world no longer looks quite as dangerous as it did,” says the International Monetary Fund’s managing director. That roughly sums up the state of the US economy too, as suggested in today’s update of The Capital Spectator’s Economic Trend Index (ETI) and Economic Momentum Index (EMI). Both indexes, which reflect a diversified set of economic and financial indicators, remain at levels historically associated with economic expansion. In addition, the near-term projection for these indexes also looks encouraging, based on econometric estimates for next several months.
There are still plenty of macro risks, to be sure, and so the analysis could change quickly, depending on how the April data compares. But based on the current numbers through the March profile, which is nearly complete in terms of economic releases, recession risk remains low. Growth overall is still sluggish, which raises obvious caveats for looking ahead. But it’s growth nonetheless and the numbers in hand imply that we’ll see more of it for the near term. Let’s take a closer look at this analysis, starting with a review of the individual indicators that comprise ETI and EMI:
Here’s how the indicators in the table above compare in the aggregate, when profiled through the lens of a diffusion index (ETI)—a measure of the percentage of indicators trending positive (as defined in the table’s “Transformation” column). A companion index tracks the median monthly changes of the indicators (EMI). Both indexes are computed based on a rolling 3-month average. As you can see, ETI and EMI remain well above their respective danger zones—50% for ETI and 0% for EMI.
Translating ETI’s values into recession-risk probabilities via a probit model also suggests that the economy was trending positive through March, as the next chart shows. Using the current data set through March, recession risk is virtually nil, according to this estimate. (A similar profile emerges for EMI after crunching the numbers in a probit model.)
Finally, let’s consider the near-term outlook for ETI and EMI by predicting future values with an econometric technique known as an autoregressive integrated moving average (ARIMA) model. The projections of the ARIMA model, which estimates the missing data points for each month, suggests that ETI will remain at levels associated with growth for the immediate future. Forecasts are always suspect, of course, but recent projections of ETI have proven to be relatively reliable guesstimates vs. the reported numbers that followed (shown by the red squares). As such, the latest projections (the four maroon-colored bars) 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 actual data, as currently known (red squares). 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 the estimates.
For additional, context, here are the last three monthly ETI and EMI updates:
18 Mar 2013
18 Feb 2013
08 Jan 2013