US Business Cycle Risk Report | 20 July 2015

The US economy has had a rough first half in 2015, but the pace of growth is picking up. The Atlanta Fed’s GDPNow model projects a second-quarter expansion of 2.4% (seasonally adjusted annual rate), based on the July 17 estimate. That’s a modest rise, but it represents an encouraging rebound from Q1’s mild contraction. It’s debatable if we’ll see the rate of growth continue to improve in the second half of the year. Meantime, a broad review of economic and financial indicators continues to reflect a positive trend for the macro profile through June. In other words, the current data strongly suggest that last month wasn’t the start of a new recession.

Using a methodology outlined in Nowcasting The Business Cycle: A Practical Guide For Spotting Business Cycle Peaks, an aggregate of economic and financial trend behavior shows that business-cycle risk remained low through last month. Indeed, the Economic Trend and Momentum indices (ETI and EMI, respectively) are still at levels that equate with expansion. The current profile of published indicators through last month  (12 of 14 data sets) for ETI and EMI reflect positive trends, with the exception of the corporate bond spread and a slightly negative dip in the year-over-year comparison for the real monetary base.

Here’s a summary of recent activity for the components in ETI and EMI:


Aggregating the data into business cycle indexes reflects positive trends overall. The latest numbers for ETI and EMI indicate 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. Based on the latest updates for June — ETI is 90.5% and EMI is 6.4% — there’s still a comfortable margin of safety between current values and the danger zones, as shown in the chart. (See note below for ETI/EMI design rules.)


Translating ETI’s historical values into recession-risk probabilities via a probit model also suggests that business cycle risk remains low for the US. Analyzing the data with this methodology implies that the odds are virtually nil that the National Bureau of Economic Research (NBER) — the official arbiter of US business cycle dates— will declare last month as the start of a new recession.


For another perspective, consider how ETI may evolve as new data is published.  One way to project future 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 August 2015. (Note that April 2015 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 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. The latest projections (the four black dots on the right in the chart above) suggest that the economy will continue to expand. The chart above also includes the range of vintage ETI projections published on these pages in previous months (blue bars), which you can compare with the actual data that followed, based on current numbers (red dots). The assumption here is that while any one forecast for a given indicator will likely miss the mark, the errors may cancel out to some degree by aggregating a broad set of predictions. That’s a reasonable assumption when we review the historical record for the ETI forecasts.

For additional perspective on judging the track record of the forecasts, here are the previous updates for the last three months:

17 Jun 2015
20 May 2015
17 Apr 2015

Note: ETI is a diffusion index (i.e., an index that tracks the proportion of components with positive values) for the 14 leading/coincident indicators listed in the table above. ETI values reflect the 3-month average of the transformation rules defined in the table. EMI measures the same set of indicators/transformation rules based on the 3-month average of the median monthly percentage change for the 14 indicators. For the chart showing EMI and ETI through last month, and for the near-term forecasts, the missing data points are estimated with an ARIMA model.

3 thoughts on “US Business Cycle Risk Report | 20 July 2015

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