Business Cycle Index

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April 2018 (data as of 3/31/2018)

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

March employment report: Back down to Earth

Employment growth moderated to 103,000 new jobs in March, with the detailed numbers pointing to a weather-related reversal. An unusually mild February likely pulled forward hiring in weather-sensitive sectors to the detriment of the March employment report. For example, the construction and retail sectors swung down a combined 130,000 jobs versus last month.

Net revisions to the employment data for January and February were also disappointing at minus 50k

Nevertheless, longer-term trends and a mosaic view of other high frequency indicators is still consistent with a healthy U.S. labor market. Average hourly earnings were back on track in March and the headline unemployment rate was unchanged at 4.1%. Broader U6 unemployment rate fell back to its cyclical low of 8%, however.

In aggregate, this report is unlikely to derail the Fed from the path they outlined at the last meeting of 2-3 more interest rate hikes this year.

 

 

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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