US Business Cycle Risk Report | 25 April 2019

The US economy continues to show signs of stabilizing at a slower pace of growth, based on a broad set of economic and financial indicators. Although the possibility of a recession can’t be ruled out in the second half of 2019 and beyond, the risk of economic contraction remains low at the moment and for the immediate future.

Although some analysts have been warning that downturn risk is rising, the evidence still supports the case for expecting slower but mostly stable growth. That’s been the view on these pages for several months and not much has changed in today’s review. In late-February, for instance, The Capital Spectator advised: “The US economic trend continues to slow, but the deceleration – so far – has been gradual and non-threatening in terms of raising recession risk to a critical level.” Ditto for last month’s macro profile.

Today’s update reaffirms that a slower-but-stable macro trend prevails, based on a set of 14 indicators that offer a broad snapshot of US economic activity. Tomorrow’s first look at the government’s first-quarter GDP report is expected to offer a comparable profile.’s consensus forecast anticipates that Q1 growth will hold steady with a moderate 2.2% increase, unchanged from the pace in last year’s final quarter.

The main source of confidence for the slower-but-stable profile: the majority of key economic and financial indicators continue to reflect a positive trend, as shown in the table below.  (For a more comprehensive review of the macro trend with weekly updates, see The US Business Cycle Risk Report.)

Aggregating the data in the table above continues to reflect a moderate growth trend overall through last month. The strength of the expansion eased in March, based on the Economic Trend Index (ETI), which ticked down to 69% last month. But that’s still well above the 50% mark — the tipping point that signals economic contraction. Meantime, the Economic Momentum Index (EMI), another business cycle benchmark based on the 14 indicators above, held steady last month at 2.5%, which is moderately above the benchmark’s 0% tipping point. (For details on the design and interpretation of ETI and EMI, see my book on monitoring the business cycle.)

Translating ETI’s historical values into recession-risk probabilities via a probit model points to low business-cycle risk for the US through last monthAnalyzing the data through this lens indicates that the odds remain virtually nil — roughly 1% — that NBER will declare March as the start of a new recession.

For the near-term outlook, consider how ETI may evolve as new data is published. One way to project values for this index is with an econometric technique known as an autoregressive integrated moving average (ARIMA) model, based on default calculations via the “forecast” package in R. The ARIMA model calculates the missing data points for each indicator for each month — in this case through March May 2019. (Note that January 2019 is currently the latest month with a complete set of published data for ETI.) Based on today’s projections, ETI is expected to remain steady and comfortably above its danger zone through next month.

Forecasts are always suspect, but recent projections of ETI for the near-term future have proven to be reliable guesstimates vs. the full set of published numbers that followed. That’s not surprising, given ETI’s design to capture the broad trend based across multiple indicators. Predicting individual components in isolation, by contrast, is subject to greater uncertainty. The assumption here is that while any one forecast for a given indicator will likely be wrong, the errors may cancel out to some degree by aggregating a broad set of predictions. That’s a reasonable view, based on the generally accurate historical record for the ETI forecasts in recent years.

The current projections (the four black dots in the chart above) suggest that the economy will continue to expand in the immediate future. The chart also shows the range of vintage ETI projections published on these pages in previous months (blue bars), which you can compare with the actual data (red dots) that followed, based on current numbers.

For more perspective on the track record of the ETI forecasts, here are the vintage projections for the past three months:

28 March 2019
21 February 2019
18 January 2019

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 purposes of filling in the missing data points in recent history and projecting ETI and EMI values, the missing data points are estimated with an ARIMA model.

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