Business Cycle Index

October 2019 (data as of 10/31/2019)

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

October employment report: Resilient labor market reinforces Fed pause

The nonfarm payrolls came in above consensus at 128k in October (consensus 90k). This increased the three-month average to 176k up from 157k. The October employment report shows strong job growth — especially considering the General Motors strike subtracted 40k payrolls and the 2020 Census unwound their temporary hiring. Headline unemployment ticked slight up to 3.6% but still well below the Fed's 4.0%-4.3% NAIRU (non-accelerating inflation rate of unemployment) range. The BCI forecasts a 33.2% probability of recession in one year (little changed from 33.0%), still above the warning threshold for leaning out of risky assets.

Implications for FedThe Fed thinks its three rate cuts are enough to counter against the trade war risks, and the hurdle for further action from here is much higher. Although the baseline view is a prolonged pause, muted inflation and asymmetric cyclical risks means the Fed is more likely to cut than to hike over the next year. Today's employment report and ISM manufacturing release confirm the baseline view of a prolonged pause.

Implications for growthFrom the point-of-view of the US BCI, short-term risk is low, but the recession clock is counting down. The probability of a US recession within 18-months is 56%, similar to the risk profile in 2006. The primary driver is the lingering impact of the 10y-3m yield curve, which had inverted 140 days, at magnitudes of inversion similar to past pre-recession episodes. The next watchpoint for the model is a rise in short-term recession risk, which could come if payrolls, consumption, or financial conditions deteriorate.

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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