Business Cycle Index

December 2019 (data as of 12/31/2019)

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

December employment report: Weak wages prolong Fed pause

Nonfarm payrolls rose 154k in December slightly below market consensus of 160k. Headline unemployment held at 3.5%, well below the Fed's 3.9%-4.3% NAIRU (non-accelerating inflation rate of unemployment) range. Broader U6 unemployment decreased 0.2% to 6.7%, the lowest rate in the series' history. The month over month wage growth for all employees in December was very soft, at 0.1%. The annual pace of wage growth is 3.0% (previously 3.4%) for production and non-supervisory workers and 2.9% (previously 3.1%) for all employees. Acceptable job growth, low unemployment, but soft wage gains confirm our baseline view of a prolonged Fed pause.

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. Our 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 confirms the baseline view of a prolonged pause.

Implications for growthDecember's moderated payrolls growth raised the BCI model's recession probabilities to 32.5%. The BCI is still suffering from the residual impact of the 10y-3m yield curve, which had inverted 140 days, at magnitudes of inversion similar to past pre-recession episodes. The 12-month probability of recession is still above the warning threshold for leaning out of risky assets.

Exhibit 1: Business Cycle Index

As of 12/31/2019

Click and drag the plot area to zoom in. Hold shift key to pan.

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 12/31/2019

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 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 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.
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