Business Cycle Index

September 2020 (data as of 09/30/2020)

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

September employment report: Slowing gains

Nonfarm payrolls increased for the fifth straight month in September adding 661 thousand jobs but came in below expectations of 800 thousand. Consistent with the rebound in payrolls, headline unemployment fell 0.5% to 7.9%. The economy has added back over 11 million jobs since April but remains well under level seen before the onset of the pandemic. The easy gains may be over, as job losses now may reflect decreased demand rather than pandemic restrictions.

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. We also believe the Fed and U.S. government will do whatever is necessary to act as a backstop to prevent catastrophic economic losses. 

Implications for growth: The BCI model estimates a 23% probability of still being in a recession in 12 months (down from 35% in August, and peak of 67% in May). A key driver of the BCI model is the consumer. The latest employment report shows that a little over half of the jobs lost between February (pre-COVID) and April 2020 (peak lockdowns) have recovered as of September. However, 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, about half responded that their layoff is permanent as of September.


Exhibit 1: Business Cycle Index

As of 09/30/2020

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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 09/30/2020

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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