Business cycle risk remains low, according to the July update of the Economic Trend (ETI) and Momentum indexes (EMI). Both benchmarks, which measure the broad trend in the economy via 14 economic and financial indicators, continue to post values that are well above their respective danger zones. That's a strong signal for anticipating that the NBER will not declare July as the start of a new recession, or so the latest numbers suggest.
The leading weak point in this analysis is the rise in the price of crude oil, which is still increasing on a year-over-year basis. But the macro headwind linked with this trend has yet to show substantial spillover effects in the other indicators. Indeed, other than oil prices, the remaining data sets that comprise ETI and EMI are still trending positive.
Here's a detailed look at how the indicators for ETI and EMI compare over the last several months:
Reviewing ETI and EMI in historical context shows that both benchmarks remain well above their respective danger zones: 50% for ETI and 0% for EMI. When the indexes fall below those levels, that will be a sign that recession risk is elevated.
Translating ETI's historical values into recession-risk probabilities via a probit model also suggests that the odds are low for thinking that July marks the start of a recession.
Let's also consider the near-term outlook for ETI 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 indicator, for each month through September (May is currently the latest month with a complete data set). Based on this projection, ETI is expected to remain well above its danger zone in the near term. 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 grey 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 a broad set of forecasts.
For additional context, here are previously published ETI and EMI updates for the last three months: