John Williams, President of the New York Fed said “I don’t have a recession in my forecast.” Neither does CapitalSpectator.com. This is not blind adherence to the prognoses of a central banker. On the contrary, the view on these pages is data-driven. Not a single indicator, but a wide range of numbers.
The obvious caveat: everything could change tomorrow. That’s still true, which is why it’s crucial to reassess each day as new numbers become available. But with the current set of numbers in hand, the current profile looks compelling as the risk of a recession in the US remains low here and now. Looking to the short-term future suggests the same thing.
Here is the reasoning behind this view. The starting point is the estimate of the low risk of recession in the main indicator which appears in the weekly updates of The U.S. Business Cycle Risk Report. The Composite Recession Likelihood Index (CRPI) currently estimates that a defined by the NBER slowdown is underway is only 10%. Until the CRPI, which aggregates signals from several multi-factor business cycle indicators, reaches above 50%, a growth bias will likely prevail to some degree. (For more details on the CRPI, see page 9 of this recent newsletter sample.)
The near-term future also looks relatively bullish, based on a pair of proprietary indicators featured in The U.S. Business Cycle Risk Report. I use the Economic Trend Index (ETI) and the Economic Momentum Index (EMI) as a basis for anticipating the US macro trend by one to two months. First, let’s look in the rearview mirror – here’s how ETI’s and EMI’s histories stack up through June, based on data released to date.
Using a statistical technique that estimates forward values for each of the 14 underlying indicators used in the ETI and EMI, and then aggregating the results, suggests that both indicators will continue to signal expansion until ‘in August. This is a relatively modest/weak expansion, but for now it is enough to keep the forces of recession at bay.
Forecasts are always suspect, of course, but the technique I use to generate forecast estimates of ETI and EMI is reliable and proven. So I’m confident that these projections will turn out to be fairly accurate approximations of the actual numbers, once the data is released.
Finally, here is an overview of the underlying datasets that include ETI and EMI:
This is a frame for my canary in the coal mine. If the current optimism for economic expansion begins to go south, early warning will appear here. In theory, the earliest a recession could start is June, which is still a work in progress in terms of published data. But the current degree of economic dynamism is probably too strong to derail the strong likelihood that the expansion will continue through June. My projections for July and August offer a similar analysis, although a little less certain. The more we look outward, the lower the confidence in the accuracy of the analysis.
In short, the risk of recession remains low in real time and in the short term. It’ll probably be true tomorrow, but I’ll run the incoming numbers again to check. Estimating whether a contraction in the United States has started, or is very likely to start, is an ever-changing estimate, one day at a time.
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The U.S. Business Cycle Risk Report
