Business Cycle Index

May 2020 (data as of 05/31/2020)

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

May employment report: Unexpected snapback

Nonfarm payrolls unexpectedly rose a staggering 2.5 million in May as states eased mandatory shutdowns and partially re-opened the economy. Job growth was broad-based across sectors. The rise in hiring in May doesn’t come close to make up for the combined 22.1 million jobs lost in March and April, but this employment report represents a turning point. The data may still be noisy and rough in the next few months, but we’ve likely reached the economic bottom. Consistent with the rebound in payrolls, headline unemployment fell 1.4% to 13.3%. The percentage of layoffs deemed “temporary” remains high.

Implications for Fed: Despite this positive employment report, we continue to believe the Federal Reserve (Fed) and U.S. government will do whatever is necessary to act as a backstop to prevent catastrophic economic losses. This can be seen in the unprecedented amount of support that has been enacted since the start of the pandemic.

Implications for growth: The BCI model and National Bureau of Economic Research both confirm the U.S economy is in a recession. The BCI model also estimates a 67% probability (up from 51%) of still being in a recession in 12 months. If economic data steadily recovers after the economy re-opens, the 12-month recession probability may retreat. The next watch point is a reduction in the recession probability below the warning threshold.

Exhibit 1: Business Cycle Index

As of 05/31/2020

Click and drag the plot area to zoom in. Hold shift key to pan.

Created with Highcharts 4.1.9 Standard deviations from zero 19701975198019851990199520002005201020152020-4-3-2-101234
1 - May - 1967
BCI: 0.81
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

As of 05/31/2020

Click and drag the plot area to zoom in. Hold shift key to pan.

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) seeks to forecast 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 seeks to forecast 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 typically indicates that the business cycle conditions are improving — either moving closer to exiting a recession or to stronger expansion.
  • A decrease in the BCI typically 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.
Download a copy of the report (PDF)

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