November's economic profile, based on the data published so far,
reveals minimal signs of deterioration. The one exception is the latest
return to a state of contraction in manufacturing via the ISM data.
For now, however, that's an outlier and the broad trend remains
positive. There's a lot of debate about whether the business cycle has
taken a turn for the worse, but arguing in the affirmative still doesn't
come with much econometric support, as this broad review of CS-ETI's
indicators reminds:
Plugging the data into a diffusion index shows that the economy's
overall momentum remains positive in the sense that a recession hasn't
started in the recent past. The majority of indicators are still
trending positive. That's not a qualitative statement about the economy
per se; rather, it's a quantitative summary of how the data is behaving,
primarily on a year-over-year basis, albeit with a few exceptions (as
noted in the "Transformation" column in the table above). Boiling it all
down to one metric gives us the following chart, which advises that the
current batch of numbers isn't currently signaling a new economic
downturn:
Converting the data in the diffusion index into probabilities via a probit model tells us more directly that recession has been a low-risk event recently:
Finally, let's consider what the data's telling us about the
near-term future by way of a sophisticated econometric technique that's
applied in a relatively straightforward way here. In particular, I've
generated forecasts for each of CS-ETI's indicators, independently of
one another, using an ARIMA model. I then aggregate the results to estimate CS-ETI for the next several months.1
The process starts by filling in the missing numbers as a bridge to
estimating each of the monthly data sets. It's safe to assume that a
fair amount of error infects any one forecast, although aggregating the
individual estimates can minimize the risk a bit if some of the errors
cancel each other out. One source for cautious optimism on this front is
the recent record in estimating CS-ETI's future path, an exercise
that's produced fairly reliable results lately. With that in mind, the
near-term outlook is encouraging for thinking that CS-ETI will continue
to post readings that are associated with economic growth.
A separate set of forecasts for CS-ETI using a vector autoregression
technique dispenses a similar set of estimates for expecting that the
next month or two won't bring a dramatic reversal of fortune for this
index.
All of this comes with the usual caveats, of course. Indeed, the range of outcomes implied by the confidence intervals
associated with CS-ETI's projections inspires a fair amount of
humility. But there's another factor that's considerably more worrisome
at the moment. The big risk for the economy may be a threat that's
immune to econometric modeling and forecasting: the U.S. government.
"Time running out on ‘fiscal cliff' deal," according to The Washington Post.
It's unclear as to exactly what failure on this matter means for the
economy. But on the topic of the economy's trend so far, a subject that
comes with a touch more clarity, the numbers still look encouraging
overall. That's no assurance that the various macro hazards won't derail
the trend in the weeks and months ahead, but for now it's still
premature to argue that growth has hit a wall.
The bottom line: as we go into the economy's year-end finale, there's
quite a bit more positive momentum in the macro trend than some
analysts recognize. That may not be enough to keep us out of trouble
going forward, but for now the case for cautious optimism is still
reasonable--particularly if Washington finds a way to deliver a
pro-growth compromise in the current fiscal debate.
* * *1. The ARIMA forecasts are calculated in R software, using Professor Rob Hyndman's "forecast" package, which optimizes the model's parameters based on each data set's historical record. ^