Last week’s disappointing economic news has raised new worries about business cycle risk for the US. It’s still premature to assume the worst, but it’s clear that there’s still not much support for a strong second-quarter rebound after Q1’s weak performance. That could change in the updates in the weeks ahead. Meantime, the macro profile for April looks weak.
The crucial exception: the labor market. Payrolls posted a solid gain last month and jobless claims continue to suggest we’ll see more of the same in the months to come. But other corners have been soft so far in 2015 through last month. Is this more than a temporary stumble? It’s prudent to answer “no” until we see a compelling case in a broad set of indicators that tell us otherwise. We’re not at that point, but April’s numbers on retail sales and industrial production look worrisome because they mark an ongoing deceleration in growth that’s becoming harder to ignore.
As such, the economic data for May could be decisive for deciding if the business cycle is dipping over to the dark side. But those numbers are still weeks away. Meantime, let’s dig a bit deeper into industrial production through last month in search of big-picture perspective.
Looking for peaks and troughs in industrial output as a proxy for the business cycle has a long history in macroeconomics. Like any one indicator, however, its value is limited in the quest to find reliable and timely signals about recession risk. But let’s put that caveat aside for now and review industrial production through the prism of a probit model.
I published a similar analysis a few weeks ago for GDP. Despite the weak Q1 report, GDP’s virtually flat performance in the first three months of this year didn’t mark a clear warning that a new recession had started. Let’s apply the same econometric analysis to industrial activity.
