Business Cycle Index

September 2019 (data as of 09/30/2019)

Updated monthly, our forecasts are designed to anticipate changes before they occur and to help you extract meaning from the noise.

September employment report: Soft enough to keep the Fed in action

The pace of hiring is slowing, but still above the replacement rate to keep unemployment steady. The labor market is strong enough to support the consumer, but soft enough to allow Fed accommodation. The nonfarm payrolls came in slightly below consensus at 136k in September (consensus 146k). This kept the three-month average flat around 157k since the last release. Headline unemployment is down 0.2% to 3.5%, the lowest since 1969 and well below the Fed's 4.0%-4.3% NAIRU (non-accelerating inflation rate of unemployment)  range.

Implications for FedThe September report is soft enough to keep the Fed in action in October. The Fed will likely cut interest rates enough in 2019 to un-invert the yield curve. With the 10-year yield at 1.5%, this translates to one or two more cuts this year. However, trade discussions next week are a swing factor that may increase or decrease the number of cuts needed.

Implications for growthThe U.S. BCI, short-term risk is low, but the recession clock is counting down. The probability of a US recession within 18-months is over 50%, similar to the risk profile in 2006. The primary driver is the 10y-3m yield curve, which is inverted 133 days and counting, at magnitudes of inversion similar to past pre-recession episodes. However, recession probabilities may lower back under the warning threshold if 1) the Fed cuts interest rates enough to un-invert the yield curve over the next couple months, and 2) macro/financial data don't deteriorate in the meantime.

Exhibit 1: Business Cycle Index

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Past data
Forecast data
Periods of recession

Source: Recession dates from National Bureau of Economic Research

Out of sample forecasts were calculated by simulating the time-series model into the future. The value shown is the median of the simulated value for the month.

Exhibit 2: Employment Forecast

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Past data
Forecast data

Source: Actual employment data from St. Louis FRED database.

Out of sample forecasts were calculated by simulating the time–series model into the future. The value shown is the median of the simulated value for the month.

Frequently asked questions

What is the Business Cycle Index?

  • The Business Cycle Index (BCI) forecasts the strength of economic expansion or recession in the coming months, along with forecasts for other prominent economic measures.
  • The two outputs featured here are the Business Cycle Index and the Employment Forecast.
  • Inputs to the model include non-farm payroll, core inflation (without food and energy), the slope of the yield curve, and the yield spreads between Aaa and Baa corporate bonds and between commercial paper and Treasury bills. A different choice of financial and macroeconomic data would affect the resulting business cycle index and forecasts.
  • "Dynamic forecasts of qualitative variables: A Qual VAR model of U.S. recessions", published in the Journal of Business and Economic Statistics in January 2005, provides background on the statistical model behind the BCI.

Why is it important?

  • The BCI forecasts the future direction of the business cycle.
  • Historically, the stock market responds to investor perceptions of the future direction of the business cycle.

Can I use the BCI as a market-timing tool?

  • No. The BCI is not meant to serve as a direct prediction regarding the future performance of any financial market. It is not intended to predict or guarantee future investment performance of any sort.

How do we interpret it?

  • An increase in the BCI indicates that the business cycle conditions are improving — either moving closer to exiting a recession or to stronger expansion.
  • A decrease in the BCI indicates that business cycle conditions are worsening — either moving closer to entering a recession or to a deeper recession.

How often is it updated?

  • The Business Cycle Index is updated monthly after payroll employment numbers are released and will be published around the 15th calendar day of the month.
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