Is the Economy Moving Toward Recession?

Generally, a recession occurs when real, or inflation-adjusted Gross Domestic Product (GDP) shows negative growth for at least two consecutive quarters. But GDP estimates are available only at a lag, so it’s possible for a recession to be underway without confirmation from the national statistics.

Bottom line – go to the US Bureau of Economics Analysis website, click on the “National” tab, and you can get the latest official GDP estimates. Today, (January 25, 2016) this box announces “3rd Quarter 2015 GDP,” and we must wait until January 29th for “advance numbers” on the fourth quarter 2015 – numbers to be revised perhaps twice in two later monthly releases.

This means higher frequency data must be deployed for real-time information about GDP growth. And while there are many places with whole bunches of charts, what we really want is systematic analysis, or nowcasting.

A couple of initiatives at nowcasting US real GDP show that, as of December 2015, a recession is not underway, although the indications are growth is below trend and may be slowing.

This information comes from research departments of the US Federal Reserve Bank – the Chicago Fed National Activity Index (CFNAI) and the Federal Reserve Bank of Atlanta GDPNow model.

CFNAI

The Chicago Fed National Activity Index (CFNAI) for December 2015, released January 22nd, shows an improvement over November. The CFNAI moved –0.22 in December, up from –0.36 in November, and, in the big picture (see below) this number does not signal recession.

FREDCFNAI

The index is a weighted average of 85 existing monthly indicators of national economic activity from four general categories – production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories.

It’s built – with Big Data techniques, incidentally- to have an average value of zero and a standard deviation of one.

Since economic activity trends up over time, generally, the zero for the CFNAI actually indicates growth above trend, while a negative index indicates growth below trend.

Recession levels are lower than the December 2015 number – probably starting around -0.7.

GDPNow Model

The GDPNow Model is developed at the Federal Reserve bank of Atlanta.

On January 20, the GDPNow site announced,

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.7 percent on January 20, up from 0.6 percent on January 15. The forecasts for fourth quarter real consumer spending growth and real residential investment growth each increased slightly after this morning’s Consumer Price Index release from the U.S. Bureau of Labor Statistics and the report on new residential construction from the U.S. Census Bureau.

The chart accompanying this accouncement shows a somewhat less sanguine possibility – namely that consensus estimates and the output of the GDPNow model have been on a downward trend if you look at things back to September 2015.

GDPNow

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