Note from dshort: This commentary has been revised to include today's release of Industrial Production and yesterday's Retail Sales adjusted with today's release of the Consumer Price Index.
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
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: Industrial Production and Real Retail Sales
This morning I've added two more of the Big Four for November: Industrial Production from the Federal Reserve, the purple line in the chart below and Real Retail Sales, the green line.
The Fed update on IP lead with the following observation:
Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October. In November, manufacturing output increased 1.1 percent after having decreased 1.0 percent in October; in addition to the storm-related rebound, a sizable rise in the production of motor vehicles and parts boosted factory output in November. [Link]
For a detailed overview of the latest Retail Sales, see my latest update, which I've revised to include today's release of the November CPI.
Current Assessment and Outlook
At this point, the average of the Big Four (the gray line in the chart above) shows us that economic expansion since the last recession had been hovering around a flat line for the past several months. But the November data for Employment, Industrial Production and Real Retail Sales have shown improvement.
As for the recent data, of course they are subject to revision, so we must view these numbers accordingly.
The behavior of all four of these indicators will be critical as move from the fourth quarter to the new year. Superstorm Sandy has not been traumatic to the economy, and we will see some positive effects from rebuilding in the impacted areas. Holiday season sales will be something to watch in the next Retail Sales release.
On the negative side, the continuing weakness in Real Personal Income Less Transfer Payments is a looming threat, and we may see evidence of it in the final tally of holiday spending. Finally, of course, the outcome of Fiscal Cliff negotiations remains a near-term worrisome wild card in the economic hand.