No Recession Is Signaled By iM’s Business Cycle Index
iMarket Signals | Jul 20, 2017 08:55AM ET
Knowing when the U.S. Economy is heading for recession is paramount for successful investment decisions. Our weekly Business Cycle Index (BCI) would have provided early reliably warnings for the past seven recessions.
The BCI at 225.0 is above last week’s upward revised 224.7, but for this Business Cycle remains below the previous high as indicated by the BCIp at 94.2. However, the 6-month smoothed annualized growth BCIg at 14.6 is below last week’s 14.8.
No recession is signaled.
Figure 1 plots BCIp, BCI, BCIg and the S&P500 together with the thresholds (red lines) that need to be crossed to be able to call a recession.
The BCI was designed for a timely signal before the begin of a recession, and could be used as a sell signal for ETFs that track the markets like SPY, IWV or VTI etc, and switch into treasury bond ETFs like IEF, TIP or BND etc.
The BCI uses the below listed economic data, and combining the components for the index in “real time”, i.e. the data is only incorporated into the index at its publication date.
- 10-year treasury yield (daily)
- 3-month treasury bill yield (daily)
- S&P 500 (daily)
- Continues Claims Seasonally Adjusted (weekly)
- All Employees: Total Private Industries (monthly)
- New houses for sale (monthly)
- New houses sold (monthly)
The 6-month smoothed annualized growth rate of series is a well-established method to extract an indicator from the series. We use this method to obtain BCIg, i.e. the calculated growth rate with 6.0 added to it, which generates, on past performance, an average 11 week leading recession signal when BCIg falls below zero.
Further, the index BCI retreats from its cyclic peak prior to a recession in a well-defined manner allowing the extraction of the alternate indicator BCIp (and its variant BCIw) from which, on average, 20 week leading recession signal is generated when BCIp falls below 25. A more detailed explanation/description can be found here .
Figure 2 plots the history of BCI, BCIg, and the LOG (S&P500) since July 1967, and Figure 3 plots the history of BCIp, i.e 46 years of history which include seven recessions, each which the BCIg and BCIp managed to indicate timely, the weeks lead to a recessions are indicated on the plots.
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