Business Cycle Index

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November 2018 (data as of 11/30/2018)

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

November employment report: Satisfactory

The November employment report is potentially market-friendly. Wage growth remained at the previous month's elevated 3%+ levels. Unemployment remained at 49-year lows. The pace of payrolls growth is enough to lower the unemployment even further over time, but modestly below consensus. In general, the report shows a strong labor market but doesn't pressure the Fed to move more (or less) aggressively. It is satisfactory enough to keep them on track.

Implications for Fed: We hold our expectations of a December rate hike at 80%. We expect 3 hikes in 2019, down from last month's expectation of 3-4 hikes. The slight downgrade in the pace of Fed tightening is from a modest uptick in concerns about the passthrough from softer high frequency measures of rental inflation onto the price indices and the disinflationary impacts of the dollar. Our prevailing view, however, is largely intact. And with the significant rally in bond markets over the last few weeks we are now quite a bit more aggressive on the Fed than the futures pricing.

Implications for growth: The employment report suggests strong income fundamentals for consumers. We expect 2.9% US GDP growth in 2018, given the fiscal stimulus package and strong economic growth in the first half of the year. Our GDP growth expectation for 2019 is 2.2%, as we incorporate the possibility of a recession in late-2019. This month's BCI model estimates a 29% probability of recession in the next year (up from 25%), just below the warning threshold. The higher recession risk is driven by slightly softer payrolls growth, the flatter yield curve, and higher credit spreads.

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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