Business Cycle Index

November 2019 (data as of 11/30/2019)

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

November employment report: Defying gravity

The pace of job gains (266k in November, +41k in upward revisions) defied market expectations. Part of the gain was a rebound from the General Motors strike, which had subtracted 40k jobs last month. Unemployment is back at recent lows of 3.5%, at the cost of a slight decrease in labor participation. Overall, this employment report suggests the U.S. labor market is still resilient.The wildcard is still trade. The tariffs currently scheduled for December 15th disproportionally impact consumer goods. A theme over 2019 was dichotomy— strong consumer but weak corporations, or strong services but weak manufacturing. If the December tariffs are implemented, this could threaten bright spots in the economy.

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. Although the 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 growthNovember's strong payrolls growth lowered the BCI model's recession probabilities. However, 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, currently sitting at 30.5%.

Exhibit 1: Business Cycle Index

As of 11/30/2019

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 11/30/2019

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.
Download a copy of the report (PDF)

Ready to take the next step? We're here to help.


Ask a question

You have unique challenges. If you have questions, please share them here. We can help—you decide how.

Ask a question

Request a meeting

We'd be honored to work with you. Let us know how you want to meet and we'll be happy to connect with you.

Request a meeting
Site preferences