Note from dshort: This commentary has been updated to include today's release of Personal Income data, which includes revisions back to January 2009.
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 understanding that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
- Real Income
- 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." In his July 10th Bloomberg TV interview, ECRI's Lakshman Achuthan cites these four at about the 2:05 minute point in his remarks. He says, and I quote "When you look at those four measures, they are rolling over."
Are they really rolling over? First, 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 update to the Big Four was today's release of the June Personal Income data, which included the annual revisions to past data back to January 2009. The chart below shows the new June data and the substantial revisions.
The revisions added a rather dramatic lift to the series and improved the upward trend in 2012. This indicator is certainly not, to use ECRI's language, "rolling over." Real Retail Sales is the one indicator that "could" be rolling over, but it is by far the most volatile of the four, so a dip in sales that is not confirmed by the other indicators has not historically been a reliable recession signal. We'll have the next preliminary retail sales data in a couple of weeks.
See also this updated chart from Dwaine van Vuuren of RecessionAlert.com. It incorporates Dwaine's preferred method of calculating the growth rate for Real Personal Income less Transfer Payments.
And here is his 5-Factor Weighted Composite, which includes a custom weighting of all four indicators.
Dwaine's analysis now puts the implied probability of recession at 2.1%. For more on his analytical approach, see his The NBER co-incident Recession Model – "confirmation of last resort".
