U.S. Economic Profile For July 19, 2013

Includes: AGG, DIA, QQQ, SPY
by: James Picerno

Business cycle risk continues to remain low, according to the June update of the Economic Trend (ETI) and Momentum indexes (EMI). Both benchmarks, which measure the broad trend in the economy by way of 14 economic and financial indicators, are still well above their respective danger zones. As a result, the NBER is unlikely to declare June as the start of a new recession, as suggested by the current data sets available.

That's not to say that all's well in the U.S. economy. Growth remains modest, at best, and the labor market's rate of expansion still falls well short of what's needed to repair the damage incurred in the Great Recession of 2008-2009. According to Macroeconomic Advisers, the labor force participation rate — the ratio of the labor force to the overall population — is projected to remain flat through 2015, or roughly at a 35-year low. The economy continues to produce jobs on a net positive basis, but the pace isn't strong enough to make a dent in this measure of the workforce.

Nonetheless, the broad trend still looks encouraging. But digging ourselves out of the macroeconomic hole, from the perspective of the last recession, remains a slow process. But slow progress is still better than nothing, and expecting more of the same for the near term still looks likely. The numbers, at least, imply no less. Here's how the underlying indicators for ETI and EMI stack up for the last several months:

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Reviewing ETI and EMI in historical context shows that both cyclical indicators remain well above their respective danger zones: 50% for ETI and 0% for EMI. If one or both of the benchmarks fall below those levels, recession risk would become elevated.

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Translating ETI's historical values into recession-risk probabilities via a probit model also suggests that the odds are low for thinking that June marks the start of a recession.

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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 August (April is currently the latest month with a complete data set). Although ETI is projected to decline modestly in the near term, the retreat is expected to keep the index well above its danger zone. (A similiar analysis applies to EMI as well.) 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-green 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.

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For additional, context, here are the previous three monthly ETI and EMI updates:

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