Business Cycle Index

June 2019 (data as of 06/30/2019)

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

June employment report: Jobs rebounds

The payrolls data bounced back strongly with Nonfarm payrolls up 224k in June. The three-month average is sitting at 171k, slower than last year’s mark of 223k, but still healthy. The 12-month BCI recession probability decreased from 32% to 28% under the warning threshold for potentially leaning out of risky assets. While the model’s recession probabilities have decreased, a sustained yield curve inversion and continued trade uncertainty remain a threat to the economy.

Implications for FedThe strong payrolls report and a trade war truce between China and the U.S. has all but dashed hopes of a 50-basis point interest rate cut in July. However, with downside risks more apparent and inflationary pressures muted, we still expect the U.S. Federal Reserve Bank (Fed) to cut rates by 25 basis points coming out of the July meetings. Based on this expectation we also expect the Fed to further cut rates in September barring any major improvements in economic data.

Implications for growthThe bounce back in the payrolls data was a positive for overall economic health and growth prospects. This along with easing trade tensions reduced the BCI recession probability back under the recession waring threshold of 30%. However, the inverted yield curve and deceleration of the Global Manufacturing Purchasing Managers Index (PMI) in May and June continue to cloud optimism on future growth prospects of the economy.

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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