Business Cycle Index

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February 2019 (data as of 02/28/2019)

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

February employment report: Noisy Strength

Looking through some of the weather noise, the labor market is still healthy. February payrolls is likely distorted by the polar vortex, which brought unusually cold rain and snow to the US. The most weather-sensitive sectors showed large dips from last month—construction fell from +53k to -31k jobs, leisure fell from +89k to 0k jobs, and retail fell from +13.7k to -6.1k. The trend of payrolls is still strong. Payrolls have averaged 186k over the past three months, down from 241k in the last release. Headline unemployment fell 0.2% to 3.8%, well below the Fed's 4.2%-4.5% NAIRU (non-accelerating inflation rate of unemployment) range.

Implications for Fed: We expect the Fed to pause interest rate increases until at least June, and expect only one hike in 2019 (unchanged). The pause reflects downside risks from earlier market volatility, earlier weakness in consumer/business confidence, slowing global growth, and muted price inflation. Wage pressures are building but the Fed has shifted its focus on price inflation. We feel good about the consumer fundamentals without fear of the Fed stopping their pause in an immediate sense.

Implications for growth: The employment report still suggests strong income fundamentals for consumers. Our GDP growth expectation for 2019 remains slightly below consensus at 2.3%, as we incorporate the possibility of a recession in late-2019. This month's BCI model estimates a 31% probability of recession in the next year (up from 28%), which is above the warning threshold. The increase in recession probability is driven by weak personal consumption in December and weak payrolls in February. We're discounting the model's warning trigger because the US government shutdown and cold weather have distorted economic data.

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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