Macro Markets Risk Index: US Business Cycle Risk Eases

US economic risk has eased in recent days, according to a markets-based estimate of macro conditions. The Macro-Markets Risk Index (MMRI) closed at +3.9% yesterday (Oct. 8) after slipping into mildly negative territory for brief periods since late-August. MMRI’s recent readings in the red mark the first run of negative values since early 2012. It’s important to note that while a markets-based view of the business cycle has turned cautious lately, there’s no confirming support in the hard economic data–at least not based on published numbers to date. Although some indicators are flashing warnings, the majority of key macro indicators are still trending positive for the US.

Meantime, a markets-based measure of the business cycle has pulled back from a clear-cut warning for the US economic outlook. A decline below 0% in MMRI indicates that recession risk is elevated while readings above 0% imply that the economy will expand in the near-term future. The return of modestly positive readings for MMRI imply that the near-term threat of recession risk for the US has receded, if only slightly.

Analyzing market-price data in the financial and commodities markets with a probit model also suggests that business-cycle risk is modestly less threatening at the moment vs. recent history.

Let’s take a closer look at the numbers, starting with MMRI, which represents a subset of the Economic Trend & Momentum indices (ETI and EMI), a pair of benchmarks that track the economy’s broad trend for signs of major turning points in the business cycle via a diversified set of indicators. (For details about ETI and EMI, see my book on monitoring the business cycle.) Analyzing the market-price components separately offers a real-time approximation of macro conditions, according to the “wisdom of the crowd.” Why look to the financial and commodity markets for insight into the economic trend? Timely signals. Conventional economic reports are published with a time lag. MMRI is intended for use as a supplement for developing real-time perspective until a complete data set is published for updating the monthly economic profile.

MMRI measures the daily median change of four indicators based on the following calculations;

US stocks (S&P 500), 250-trading day % change
Credit spread (BofA ML US High Yield Master II Option-Adjusted Spread), inverted 250-trading day % change
Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield)
Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change

Here’s how MMRI compares on a daily basis since August 2007:


The next chart shows the daily values for MMRI over the last 12 months on a daily basis:


For another real-time approximation of recession risk, let’s review market prices via a probit model. The current estimate shows that business-cycle risk, while still elevated vs. the last several years, has fallen in recent days. The probability that an NBER-defined recession has started for the US remains a relatively low-probability event–roughly 9%, as of Oct. 8–roughly half the level relative to the recent highs we’ve seen since late-August. This estimate is based on a probit model that crunches the numbers on four data sets: the US stock market (S&P 500); the Treasury yield curve (10-year yield less the 3-month T-bill yield); the credit spread (BAA-rated bond yield less AAA yield); and spot crude oil prices (based on the US benchmark, West Texas Intermediate). For details, see this summary.


The bottom line: business cycle risk remains moderately higher vs. the last several years, according to a markets-based estimate. Compared with recent history since August, however, the crowd has pared back its anxiety level for anticipating trouble for the US macro trend in the near future.