US Business Cycle Risk Report | 19 March 2020

The global coronavirus pandemic is creating havoc in economies around the world and the US is no exception. In the wake of this crisis, the standard modeling techniques have become worthless for estimating current conditions and estimating the near-term. The only thing that’s certain is that a significant shock is unfolding in real time—a shock that’s not being picked up, yet, in the economic data that’s been published to date. But there will be blood. The key questions for the recession: how deep and how long? Unclear. Since we’re heading into an unprecedented period in modern times, uncertainty is extraordinarily high. Nonetheless, let’s run through the numbers, if only as an academic exercise to profile the US economy as it was on the eve of the deluge.

Let’s start with an overview of the key indicators. As the table below shows, the February profile is upbeat. But in what’s likely to be an extraordinary reversal of fortunes, the US macro trend is on track to deteriorate in March and beyond. There are few numbers for March at this point but the available data so far reveals a shift to red ink. Notably, the 1-year trend for the stock market, the high-yield bond spread and consumer sentiment have taken a sharp turn into red-ink terrain for this month to date and there’s more to come.

Aggregating the data into business-cycle benchmarks through February shows that a moderate pickup in economic was unfolding before the coronavirus blowback hit the US. The Economic Trend and Economic Momentum indexes (ETI and EMI) were still comfortably above their tipping points (50% and 0%, respectively) that mark recessions, as of last month.

Projecting the business cycle indexes into the near-term future shows that the deterioration is starting to bite (see chart below). This modeling, which reflects point forecasts, almost certainly underestimates the depth and strength of the downturn that’s unfolding. As incoming data is incorporated in the days and weeks ahead, these projections will almost certainly suffer sharp downside revisions.

The US may ultimately avoid an outright contraction in March, but April will certainly feel the full brunt of the economic shutdown that’s increasingly spreading across America and the world. David Beckworth, a senior research fellow at the Mercatus Center at George Mason University, summarizes the likely path ahead when he writes:

The economic fallout from the pandemic of COVID-19 is likely to be large. Entire portions of the US economy are shutting down, and some forecasters are predicting that GDP will contract as much as 10 percent in 2020. Jason Furman, former chair of the Council of Economic Advisers for President Obama, believes the contraction could be even worse and surpass the depths of the Great Recession of 2007–2009.

Welcome to regime shift on steroids. The economic pain ahead will have broad and deep repercussions throughout society. The reordering of assumptions and expectations will include upending quite a lot of the received wisdom on how to model, track and evaluate economic and financial risk.

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No one knows how the approaching tsunami will play out, other than the near-certainty that the blowback will be significant and spare no corner.

“The entire global economy is grinding to a halt,” advises Julia Coronado, founder of MacroPolicy Perspectives.

Unfortunately, that simple, dire analysis is beyond refute.

At some point the tide will turn and the focus will turn to estimating when the economy stabilizes. But we’re only in the early stages of the crisis and so it’s too soon to begin looking for light at the end of the tunnel. Fortunately, that day will come.

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By James Picerno

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