Business Cycle Index

August 2019 (data as of 08/31/2019)

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

August employment report: Labor market softness leaves door open for more Fed cuts

The nonfarm payrolls came in below consensus at 130k in August. Increasing the three-month average 16k to 156k. Temporary hiring for the 2020 Census (+25k jobs) masks some softness in job gains. We add the possibility of another 25bp cut in December (four cuts total in 2019), particularly if trade talks remain unsuccessful or data continues weakening. The BCI forecasts a 30.1% probability of recession in one year (up from 28.5%), back above the warning threshold for leaning out of risky assets.

Implications for Fed: We expect 25bp cuts in September and October, and now the possibility of another cut in December if trade talks are unsuccessful or if data continues to weaken. With the 10-year U.S. Treasury yield hovering at the recent range of 1.45-1.6%, the Fed may need three additional cuts to un-invert the yield curve. The Fed wants to be accommodative and they don't have enough confidence in the outlook to challenge the bond market's pricing. Additionally, manufacturing softness, global growth, and trade tensions remain headwinds for the US economy.

Implications for growthThe U.S. BCI's 12-month recession probability is back above the warning threshold, given softer August job gains and larger yield inversion. Recession probabilities may lower back under the warning threshold if the Fed cuts interest rates enough to un-invert the yield curve over the next couple months, and macro/financial data doesn't deteriorate in the meantime.

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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