Business Cycle Index

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June 2018 (data as of 5/31/2018)

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

Current reading and trend

May employment report: Even lower unemployment, wages rise

Unemployment edged even lower in May's employment report, such that headline and broad unemployment now match the lows they hit in the 2000s’ cycle. If headline unemployment falls further, it would be the lowest level since the late-1960s. According to the Atlanta Fed jobs calculator, the job replacement rate to keep unemployment steady is only 110,000 new jobs per month. That estimate sits well below our expected pace of 160,000 jobs per month. A 50-year record low unemployment rate appears within sights.

The May employment report's 2.8% annual pace of wage growth is modestly higher than expected. However, the annual pace of wage growth was 3.5% - 4.5% during the last three cycles' unemployment lows. With such a tight labor market, standard labor market models would suggest more wage growth is likely in the months and years ahead.

Implications for Fed: The employment report is modestly hawkish, but not enough to change the strategist view of 3-4 hikes per year.

Implications for growth: We expect 2.5% US GDP growth in 2018 (unchanged). The employment report still suggests strong income fundamentals for consumers. The BCI model estimates a 25% probability of recession in the next year, if we adjust for the distortions in the Treasury-EuroDollar (TED—the interest rate differential between interbank loans and short-term U.S. government debt) spreads. This recession probability signals caution, but is not a cause for immediate alarm.


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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