Recession Risks Rise Again: Should You Be Worried? Here's What the Data Says
What are the choices for monitoring and estimating recession risk? Slightly lower than the number of stars in the universe. Ok, I’m exaggerating, but not much.
The good news: the search for robust, relatively reliable indicators narrows the field dramatically.
But there’s always more to learn, in part because the supply of data sets is vast, increasingly so. This brings me to another indicator that looks promising: state coincident indexes.
Every state’s economy is, to some degree, unique, although the gravitational pull of the national economy casts a long shadow.
Tracking each state economy separately, and then aggregating the results, provides a different spin on the US business cycle compared with national indicators.
Think of it as a bottom-up model vs. the standard top-down approach via US retail sales, industrial production, etc.
Conveniently, the Philly Fed publishes monthly coincident indicators for each state. Aggregating the 50 signals into a composite index provides a somewhat different view of the US business cycle vs. traditional top-down metrics.
There are several ways to process the numbers – my preference, shown in the chart below, is a 3-month-change model. If a state’s 3-month change is negative (positive), the signal is negative (positive).
Summing the negatives and positives provides a national profile. The current reading is 0.48 — in other words, 48% of the states are posting negative 3-month changes for their respective coincident indicator.
As shown below, the composite reading maps fairly closely with NBER-defined downturns, and so the current signal is issuing a warning, albeit a warning that has yet to provide what might be thought of as passing the point of no return. But it’s close.
The
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