Business Cycle Index

November 2020 (data as of 11/30/2020)

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

November employment report: Slowing Growth

Nonfarm payrolls increased for the seven-straight month in November adding 245 thousand jobs but missing expectations of 440 thousand. Consequently, headline unemployment fell 0.2% in November to 6.7%. The economy has added back around 12 million jobs since April but remains well under level seen before the onset of the pandemic. Positive vaccine news has brought optimism to the markets, however increasing cases across the country has resulted in additional economic lockdowns which may further slow employment recovery.

Implications for Fed: Implications for Fed: The adoption of an average inflation rate target by the Federal Reserve (Fed) does not change our current belief of accommodative, low interest rate policies in the shorter term.

Implications for growth: The BCI model estimates a 22% probability of still being in a recession in 12 months (slightly up from 19% in October, but still lower than the peak of 67% in May). A key driver of the BCI model is the consumer. The slight uptick in recession probability reflects the slowing pace of payroll gains in November. The pace of labor market recovery may be exacerbated by renewed localized lockdowns within the U.S. because of increased Covid-19 infections. A concern is that layoffs may be increasingly permanent. In a Bureau of Labor Statistics (BLS) survey which asked if workers expected to get their job back in the next 6 months, over 60% responded that their layoff is permanent as of November. Fiscal stimulus continues to be an important backstop to prevent a consumer cliff.


Exhibit 1: Business Cycle Index

As of 11/30/2020

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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 11/30/2020

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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.
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