Business Cycle Index

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January 2019 (data as of 01/31/2019)

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

January employment report: Noisy but strong

Looking through some government shutdown noise, the labor market is strong. Nonfarm payrolls rose 304k in January, 160k above consensus and the participation rate rose 0.1% to 63.2%, the highest since 2013Q3. Wage growth remains high but did not accelerate further this month. The partial US government shutdown adversely impacted unemployment surveys this month; however, we expect a reversal next month assuming the government does not shut down again. We feel good about consumer fundamentals without the fear of pressuring the Fed to stop their pause in interest rate hikes.

Implications for Fed: We expect the Fed to pause interest rates increases until at least June, then only hike once in 2019. The pause reflects downside risks from market volatility, slowing global growth, and fall in consumer/business confidence.

Implications for growth: The employment report still suggests strong income fundamentals for consumers. Our GDP growth expectation for 2019 remains below consensus at 2.2%, as we incorporate the possibility of a recession in late-2019. This month's BCI model estimates a 28% probability of recession in the next year (barely changed from 29%), just below the warning threshold. The model didn't change much over the month because a flatter yield curve and wider credit spreads raised recession risk, but lower Treasury-EuroDollar spread and strong payrolls lowered recession risk.

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.
  • The ongoing track record of the BCI forecasts is available on

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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