US Economic Profile | 20 November 2014

The outlook for the global economy is suffering these days, but there’s still no clear sign that the deceleration in macro activity has infected the US. Based on the latest numbers for October, the broad trend for the US remains distinctly positive. A diversified mix of economic and financial indicators continues to reflect growth through last month. But there are clouds on the horizon. Stagnation in Europe, recession in Japan, and slowing growth in China collectively pose a threat to America’s positive momentum — a threat that may take a bite out of US activity at some point. But for the moment, the numbers for the US overall reflect a clear bias for expansion.

Using a methodology outlined in Nowcasting The Business Cycle: A Practical Guide For Spotting Business Cycle Peaks, economic and financial trends suggest that recession risk for the US remains low as of October. The Economic Trend and Momentum indices (ETI and EMI, respectively) are still at levels that equate with expansion. The current profile of published indicators for last month to date (12 of 14 data sets) for ETI and EMI reflect solidly positive trends.

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


Aggregating the data into business cycle indexes continues to show a positive trend. 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. For now, however, there’s still a sizable margin of safety between current values for October (100.0% for ETI and 11.4% for EMI) and the danger zones.


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.


Next, let’s consider how ETI’s values may evolve as new data is published in the near future.  One way to estimate expected 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 December 2014. (August 2014 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. As such, the latest projections (the four pink bars on the right in the chart above) offer support for cautious optimism. The chart above also includes the vintage ETI projections published on these pages in previous months, which you can compare with the complete monthly sets of actual data that followed, based on current numbers (red dots). The assumption here is that while any one forecast for a given indicator is likely to be wrong, the errors may cancel out to some degree by aggregating a broad set of predictions. The historical record for this forecast methodology suggests that’s a reasonable assumption for looking ahead to the next few months.

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

20 Oct 2014
19 Sep 2014
20 Aug 2014

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