The US economy continued to grow in December. That's the message from
the incoming numbers for last month, echoing the analysis from our previous update
a month ago. Although several key reports for December are still
missing, the numbers published so far suggest that the economy ended
2012 on an upbeat note. Anything's possible, of course, when it comes to
yet-to-be published and revised indicators. But the early analysis of
the December economic profile tells us that the odds remain low that the
end of last year will mark the start of a new recession.
Let's dig into the data for some perspective on how the broad trend
looks at this point. In the table below, eight of 14 indicators in The
Capital Spectator Economic Trend Index (CS-ETI) published for December
are trending positive.
Here's how the 14 indicators stack up on an historical basis as
tracked by a diffusion index, aka CS-ETI, which measures the share of
this data set that's trending positive in terms of a three-month rolling
average. With readings in the 75%-to-90% range in recent months, the
odds of a new recession appear low. What would change the analysis? If
CS-ETI falls below 60%, which would constitute a warning that the trend
is weakening. A drop under 50% would be a virtual certainty that the
business cycle has crashed. The good news is that we're nowhere near
those tipping points.
For another perspective on the 14 indicators in the table above,
let's consider another measure of the business cycle: The Capital
Spectator Economic Momentum Index (CS-EMI), which was introduced last month.
The basic idea here is to measure the median percentage change in the
14 indicators for another perspective on the business cycle. Here's how
CS-EMI compares through history on a three-month rolling basis. As you
can see, the readings for this indicator are also favorable for arguing
that growth still has the upper hand
Returning to CS-ETI, here's how this macro benchmark compares when we
convert the underlying data into recession-risk probabilities via a probit model.
Here too the numbers suggest that another downturn is a low-probability
event through December. Analyzing its index counterpart--CS-EMI--in
terms of a probit model tells a similar story.
Finally, let's model the near-term outlook by estimating the next
several monthly values for CS-ETI's three month averages. I generated
forecasts for each of CS-ETI's indicators, independently, using an ARIMA model via the "forecast" package in R.
Next, I aggregated the results to estimate CS-ETI for the next several
months by filling in the missing numbers for 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. For some
context, the chart below tracks earlier estimates and compares them with
the actual values that were reported later. As you can see, the
estimates so far have been useful for developing some intuition about
where CS-ETI is headed. Looking ahead still suffers all the usual
caveats, but the current outlook suggests that CS-ETI's readings will
remain comfortably on the side of growth.
Overall, the numbers tell us that recession risk appears low through
December, based on the latest economic reports. That's no guarantee that
the updates in the weeks ahead won't bring darker news. But if the
economy is set to deteriorate, the signals will be conspicuous as new
data arrives and previously published numbers are revised downward. For
now, however, the outlook remains relatively encouraging for
anticipating that the economy will continue forge ahead with a modest
growth trend.