Courtesy of Guy Lerner
Our real time recession indicator is constructed from various leading economic indicators and two pricing models. The indicator continues to show that the US economy is NOT in a recession.
The following data is used in the construction of the indicator: 1) Aruoba-Diebold-Scotti Business Conditions Index (ADS); this is from the Philadelphia Federal Reserve and it is designed to track real macroeconomic activity at a high frequency; 2) the Chicago Fed National Activity Index (CFNAI); this is from the Chicago Federal Reserve, and it uses 85 different variables in its computation; 3) There are two components from the Economic Cycle Research Institute, the Leading Economic Indicator (LEI) and Weekly Leading Index (WLI). Two pricing models are used. One is the Faber model, which looks at price in the SP500 relative to its simple 10 month moving average. The second is proprietary, and it looks at price relative to past pivot points and trend lines formed by those pivot points. The final composite indicator is shown in figure 1, a weekly chart of the SP500.
Figure 1. Real Time Recession Indicator
Figure 2 shows the pivot points that are used to determine whether the US economy is in recession. By convention, our rules state that a close below 3 pivot points is a recession. Therefore, a close below the 1377 pivot would be a recession. This is a 25% drop in the SP500 and such a drop would most likely be associated with a recession anyways. This is not particularly informative. A more likely scenario is that buyers will surface on any kind of price drop thus producing another pivot point. This would mean that a close below the pivot at SP500 1609 would be associated with a recession.
Figure 2. SP500/ weekly
