Note from dshort: This commentary has been revised to include this morning's release of the April data for Industrial Production.
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:
- Industrial Production
- Real Personal Income (excluding transfer payments)
- Real Retail Sales (a more timely substitute for Real Manufacturing and Trade Sales)
The Latest Indicator Data
I've now updated this commentary to include April Industrial Production, which included revisions back to November. As the adjacent thumbnail illustrates, this indicator has risen over the past year but the trajectory has not been smooth and, as I mentioned, is extensively revised.
Today's Industrial Production index for April declined 0.5% from March, the steepest drop since the -0.8% reading eight months ago. The Briefing.com consensus was for a 0.2% decline. The latest year-over-year growth rate of 1.95% to two decimal places is fractionally above the 1.94% YoY in January, and that was the lowest reading since January 2010. If we study this YoY chart in the Appendix below, which dates from the WWI era, we can plot the Industrial Production level for the beginning months of the 17 recessions over this timeframe. The April reading of 1.9% falls in the bottom half. It is higher than six of them but lower than eleven.
The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data point is for the 47th month. In addition to the four indicators, I've included an average of the four, which, as we can see, looks to be flattening out of late.
Here is the same chart and table with Real Manufacturing & Trade Sales, a less timely (one month delayed) but interesting alternative to Real Retail Sales. The next Manufacturing data, released at the end of May, will be through March.
Current Assessment and Outlook
The weakness in today's Industrial Production report is not encouraging. This indicator will be particularly important in the next few months as a gauge of whether manufacturing is enters a cycle of cutbacks in production. However, as I mentioned earlier, this indicator is extensively revised. Today's release contained revisions back to November, and the two most recent monthly revisions were negative one: -0.12% for February and -0.20% for March.
Next up, tomorrow, I'll update the April Real Retail Sales after we have the April Consumer Price Index data.
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.
Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions. Rather than having four separate charts, I've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See my note below on recession boundaries).
The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.
As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.
Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
And finally, for sharp-eyed readers who can don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.
History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.
The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been upward, although we have that strange anomaly caused by the late 2012 tax-planning strategy that impacted the Personal Income.