Note: This commentary has been updated to incorporate the October 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:
- Nonfarm Employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Latest Indicator Data
Today's report on Industrial Production for October shows no month-over-month change (0.04 percent to two decimals), which was below the Investing.com consensus of 0.2 percent. The previous month was revised downward from 0.1 percent to -0.2 percent. Industrial Production peaked in November 2014, only one point higher than its pre-recession peak in November 2007. It has contracted for 16 of the last 23 months.
Here is the overview from the Federal Reserve:
Industrial production was unchanged in October after decreasing 0.2 percent in September. Although the level of industrial production in September was the same as the previous estimate, revisions to the index for utilities raised the rate of change in total industrial production in August and lowered it in September. In October, manufacturing output increased 0.2 percent, and mining posted a gain of 2.1 percent for its largest increase since March 2014. The index for utilities dropped 2.6 percent, as warmer-than-normal temperatures reduced the demand for heating. At 104.3 percent of its 2012 average, total industrial production in October was 0.9 percent lower than its year-earlier level. Capacity utilization for the industrial sector edged down 0.1 percentage point in October to 75.3 percent, a rate that is 4.7 percentage points below its long-run (1972–2015) average. [view full report]
The chart below shows the year-over-year percent change in Industrial Production since the series inception in 1919, the current level is lower than at the onset of 15 of the 17 recessions over this time fame of nearly a century.
Capacity Utilization
The Fed's monthly Industrial Production estimate is accompanied by another closely watched indicator, Capacity Utilization, which is the percentage of US total production capacity being used (available resources includes manufacturing, mining, and electric and gas utilities). In addition to showing cycles of economic growth and demand, Capacity Utilization also serves as a leading indicator of inflation.
Here is a chart of the complete Capacity Utilization series, which the Fed began tracking in 1967. The linear regression assists our understanding of the long-term trend. We've highlighted the post-recession peak in November 2014.
The latest reading is well off its interim peak and remains below the regression.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.
Assessment and Outlook
The US economy has been slow in recovering from the Great Recession, and the overall picture has been a mixed bag for well over a year and counting. Employment and Income have been relatively strong. Real Retail Sales have been weak at best over the past twelve months, and Industrial Production has essentially been in a recession.
Here is a percent-off-high chart based on an average of the Big Four. The interim high was in November 2014 (fractionally below zero at three decimal places). The indicator primarily responsible for this decline is Industrial Production. Incidentally, the last time the average of the four set an all-time high was in January 2006.
The next update of the Big Four will be the Mid-September release of the August numbers for Real Retail Sales.
