Economic updates in recent weeks suggest that the economy is facing new headwinds. Notably, Industrial production and housing starts slumped in April. The latest data points may imply trouble down the road, but the case is still weak for arguing that the economy's suffering in the here and now. Indeed, a big picture review of the business cycle betrays few signs of stress, based on today’s update of The Capital Spectator's Economic Trend Index (ETI) and Economic Momentum Index (EMI). In other words, the odds are low that the NBER will eventually declare April as the start of a new recession, based on the current data sets available.
For a closer look at the numbers, let’s start with a recap of all the indicators in ETI and EMI. Although the degree of positive momentum is slowing for some indicators in the April column—the ISM Manufacturing Index and industrial production—the downshifting is hardly universal. What's more, it's notable that negative comparisons are MIA for all the numbers in the March to April period. The closest that the numbers come to red ink is in the April entry for the Consumer Sentiment Index, which is unchanged as of last month vs. its year-earlier level.
Looking at ETI and EMI in historical context shows that both measures continue remain well above their respective danger zones: 50% for ETI and 0% for EMI.
Translating ETI's historical values into recession-risk probabilities via a probit model also suggests that the odds are low for thinking that April marks the start of a recession.
Finally, let's consider the near-term outlook for ETI and EMI by predicting future values with an econometric technique known as an autoregressive integrated moving average (ARIMA) model. The ARIMA model estimates the missing data points for each month through June. Although ETI is projected to decline modestly in the near term, the retreat is expected to keep the index well above its danger zone. Forecasts are always suspect, of course, but recent projections of ETI have proven to be relatively reliable guesstimates vs. the full set of monthly reported numbers that followed. As such, the latest projections (the four light blue bars on the right) offer some support for cautious optimism. For comparison, the chart below also includes ARIMA projections published on these pages in previous months, which you can compare with the actual data, as currently known (red squares). The assumption here is that while any one forecast is likely to be wrong, the errors may cancel one another out to some degree by aggregating the estimates.
For additional, context, here are the last three monthly ETI and EMI updates: