What the Big Four Indicators are Saying about the Economy

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Note from dshort: This commentary has been revised to include today's release of Personal Income data from BEA's monthly Personal Income and Outlays report.


Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.

There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

big four indicators nov 30

  • Industrial Production
  • Real Personal Income (excluding transfer payments)
  • Employment
  • Real Retail Sales

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee."

Here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators.

The FRED charts are excellent. They show us the behavior of the big four indicators currently (the green line) as compared to their best, worst and average behavior across all the recessions in history for the four indicators (which have start dates). Their snapshots extend from 12 months before the June 2009 recession trough to the present.

The Latest Indicator Data: Real Personal Income Excluding Transfer Payments

This morning we got the last of the Big Four for October: Real Personal Income Excluding Transfer Payments, the red line in the chart below.

Big Four Indicators Since 2009 Trough

Real PI Less TP declined 0.1% in October. The BEA report points out that 24 states were impacted by Hurricane Sandy, which hit land on October 29th but began its toll on the economy prior to actual landfall. The BEA press release states:

The storm affected 24 states, with particularly severe damage in New York and New Jersey. BEA cannot quantify the total impact of the storm on personal income and outlays because most of the source data used to estimate these components reflect the effects of the storm and cannot be separately identified. However, BEA did make adjustments where source data were not yet available or did not reflect the effects of Sandy. The largest of these adjustments was for work interruptions, which reduced wages and salaries by about $18 billion (at an annual rate).

Current Assessment and Outlook

At this point, with all indicators for October on the books, the average of the Big Four (the gray line in the chart above) shows us that economic expansion since the last recession has been hovering around a flat line for the past seven months. Are we tipping into a recession? ECRI has reinforced its claim that we are in a recession and puts the cycle peak in July (more here). On the other hand, a post-Sandy rebound, good holiday sales and favorably received outcome to Fiscal Cliff negotiations could easily put the economy into indisputable expansion mode.

As for the recent data, of course they are subject to revision, so we must view these numbers accordingly.

Background Analysis: The Big Four Indicators and Recessions

The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, I've plotted the same data using a "percent off high" technique. In other words, I show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is my own four-pack showing the indicators with this technique.

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Source: Advisor Perspectives

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