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The US economy continued to grow in December. That's the message from the incoming numbers for last month, echoing the analysis from our previous update a month ago. Although several key reports for December are still missing, the numbers published so far suggest that the economy ended 2012 on an upbeat note. Anything's possible, of course, when it comes to yet-to-be published and revised indicators. But the early analysis of the December economic profile tells us that the odds remain low that the end of last year will mark the start of a new recession.

Let's dig into the data for some perspective on how the broad trend looks at this point. In the table below, eight of 14 indicators in The Capital Spectator Economic Trend Index (CS-ETI) published for December are trending positive.

(click to enlarge)

Here's how the 14 indicators stack up on an historical basis as tracked by a diffusion index, aka CS-ETI, which measures the share of this data set that's trending positive in terms of a three-month rolling average. With readings in the 75%-to-90% range in recent months, the odds of a new recession appear low. What would change the analysis? If CS-ETI falls below 60%, which would constitute a warning that the trend is weakening. A drop under 50% would be a virtual certainty that the business cycle has crashed. The good news is that we're nowhere near those tipping points.

For another perspective on the 14 indicators in the table above, let's consider another measure of the business cycle: The Capital Spectator Economic Momentum Index (CS-EMI), which was introduced last month. The basic idea here is to measure the median percentage change in the 14 indicators for another perspective on the business cycle. Here's how CS-EMI compares through history on a three-month rolling basis. As you can see, the readings for this indicator are also favorable for arguing that growth still has the upper hand

Returning to CS-ETI, here's how this macro benchmark compares when we convert the underlying data into recession-risk probabilities via a probit model. Here too the numbers suggest that another downturn is a low-probability event through December. Analyzing its index counterpart--CS-EMI--in terms of a probit model tells a similar story.

Finally, let's model the near-term outlook by estimating the next several monthly values for CS-ETI's three month averages. I generated forecasts for each of CS-ETI's indicators, independently, using an ARIMA model via the "forecast" package in R. Next, I aggregated the results to estimate CS-ETI for the next several months by filling in the missing numbers for each of the monthly data sets. It's safe to assume that a fair amount of error infects any one forecast, although aggregating the individual estimates can minimize the risk a bit if some of the errors cancel each other out. For some context, the chart below tracks earlier estimates and compares them with the actual values that were reported later. As you can see, the estimates so far have been useful for developing some intuition about where CS-ETI is headed. Looking ahead still suffers all the usual caveats, but the current outlook suggests that CS-ETI's readings will remain comfortably on the side of growth.

Overall, the numbers tell us that recession risk appears low through December, based on the latest economic reports. That's no guarantee that the updates in the weeks ahead won't bring darker news. But if the economy is set to deteriorate, the signals will be conspicuous as new data arrives and previously published numbers are revised downward. For now, however, the outlook remains relatively encouraging for anticipating that the economy will continue forge ahead with a modest growth trend.

Source: Profiling Current U.S. Economic Prospects