U.S. Economic Profile

by: James Picerno

Economic news in recent months has been somewhat mixed, but the broad trend continues to look encouraging. The May profile of the economy, using the numbers published so far, shows few signs of stress, based on yesterday’s update of The Capital Spectator's Economic Trend Index (ETI) and Economic Momentum Index (EMI), which are comprised of 14 economic and financial indicators. As a result, business cycle risk remains low and so it's unlikely that the NBER will eventually declare May as the start of a new recession, as suggested by the current data sets available.

Two exceptions to the otherwise upbeat numbers for May: the ISM Manufacturing Index and oil prices. In both cases, the May readings turned negative. It's unclear if this is noise or signs of deeper troubles down the road. But for now, these isolated patches of red ink don't look threatening to the overall trend.

Looking at ETI and EMI in historical context shows that both measures 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 May 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 July. 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 diagonally striped 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 complete monthly sets of actual data, as currently known (red circles). 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.