With the stock market correction, it is natural to assume that the economy is degrading. And there are several pundits throwing around forecasts of a recession. But our Econintersect Economic Index (EEI) moderately improved and still remains well into territory associated with normal expansions.
Analyst Summary of this Economic Forecast
Our last forecast showed a significant decline in our economic index. This month there was a slight bounce. Still we are seeing mixed trend lines – which usually happens when there is an overall reversal in trends. Our major worry is the rapid deceleration of growth in rail transport data – a usual flag for a slowing economy.
The forward-looking leading and coincident data trends show no agreement in rate or even direction of growth – no change from the last few months.
Note that the quantitative analysis which builds our model of the economy does not include personal income or expenditures data sets.
The relationship between retail sales and employment is also degrading – but still remains marginally in positive territory. Historically, when this ratio is in negative territory it indicates a slowing economy. Note that neither employment nor retail sales are part of our economic model.
Econintersect checks its forecast using several alternate monetary based methods – and the checked forecasts show economic growth.
Our employment forecast continues to show good employment growth six months from today.
Note that the majority of the graphics in this post-auto-update. The words are fixed on the day of publishing, and therefore you might note a conflict between the words and the graphs due to new data and/or backward data revisions.
This index is not designed to guess GDP – or the four horsemen used by the NBER to identify recessions (industrial production, business sales, employment, and personal income). It is designed to look at the economy at the Main Street level.
The graph below plots GDP (which has a bias to the average – not median – sectors) against the Econintersect Economic Index.
This post will summarize the:
Special Indicators:
The consumer is still consuming – and the ratio between spending and income remains about average to the levels seen since the Great Recession.
Seasonally Adjusted Spending’s Ratio to Income (an increasing ratio means Consumer is spending more of Income)
The St. Louis Fed produces a Smoothed U.S. Recession Probabilities Chart which is currently giving no indication of an oncoming recession.
Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching”, International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)
Econintersect reviews the relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales. This index remains positive – but the ratio is degrading. When retail sales grow faster than the rate of employment gains (above zero on the below graph) – a recession is not imminent. However, this index has many false alarms.
Growth Relationship Between Retail Sales and Non-Farm Private Employment – Above zero suggests economic expansion
GDPNow
The growth rate of real gross domestic product (GDP) is the headline view of economic activity, but the official estimate is released with a delay. Atlanta’s Fed GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release. Econintersect does not believe GDP is a good tool to view what is happening at Main Street level – but there are correlations.
Initial forecast: 2.6 percent — October 29, 2018
The initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 2.6 percent on October 29. The advance estimate of third-quarter real GDP growth released by the U.S. Bureau of Economic Analysis on October 26 was 3.5 percent, 0.1 percentage point below the final GDPNow model nowcast released the previous day.
