Business Cycle Index

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April 2019 (data as of 04/30/2019)

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

April employment report: Strong but not the Fed’s focus

The labor report shows a tight labor market with strong payrolls, low unemployment, and modest wage growth. Nonfarm payrolls rose 263k in April, above the consensus of 180k. Headline unemployment fell 0.2% to 3.6%, well below the Fed's 4.1%-4.5% NAIRU (non-accelerating inflation rate of unemployment) range and the lowest level since December 1969. However, the Fed's main focus is on price inflation. 

Implications for Fed: The Fed is in no hurry to change interest rates. Our strongest conviction view is that the market is incorrectly pricing rate cuts in 2019. The market has priced in a 47% probability of a rate cut by December 2019. We think the next move for the Fed will be a hike. The timing of the hike is less certain and will be determined by core Personal Consumption Expenditures inflation.

Implications for growth: The employment report still suggests strong income fundamentals for consumers. Our GDP growth expectation for 2019 remains marginally below consensus at 2.3%. The 12-month BCI forecasts a 29% probability of recession in one year, which is little changed from last month, and still just below the warning threshold for potentially leaning out of risky assets. 

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.
Download a copy of the report (PDF)


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