Business Cycle Index

July 2020 (data as of 07/31/2020)

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

July employment report: Continued rebound

Nonfarm payrolls increased for the third straight month in July adding 1.8 million jobs beating expectations as the economy continued to re-opened. Payrolls have added 9.3 million jobs since April but still remains around 12.9 million jobs below levels before mandatory shutdowns due to COVID-19. 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 0.9% to 10.2%.

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 37% probability (down from 62%) of still being in a recession in 12 months. Economic activity has rebounded sharply in the last few months, but the recovery may stall if virus infection rates continue to rise. With or without mandated lockdowns, increased infection rates changes consumer behavior. If economic activity is able to steadily recover, the 12-month recession probability may retreat below the warning threshold.

Exhibit 1: Business Cycle Index

As of 07/31/2020

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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 07/31/2020

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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) 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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