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 belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

  • Industrial Production
  • Real Personal Income (excluding Transfer Payments)
  • Nonfarm Employment
  • Real Retail Sales
  • The Latest Indicator Data

    According to the Federal Reserve, “Industrial production edged down 0.1 percent in October after having advanced 0.8 percent in September. In October, manufacturing output increased 0.2 percent for the second consecutive month.” The full report is available here.

    Today’s month-over-month decline of 0.1 percent came in below the consensus of 0.2 percent, although their own forecast was for a flat 0.0 percent.

    As I’ve mentioned before, my personal view is that Industrial Production is the least useful of the Big Four economic indicators. It’s a hodge-podge of underlying index components and subject to major revisions, which undercuts its value as a near-term indicator of economic health. As a long-term indicator, it needs two key adjustments to have any correlation with economic reality. First, it should be adjusted for inflation using some sort of deflator relevant to production. Second, it should be population-adjusted.

    The chart below is my preferred way to look at Industrial Production over the long haul. I’ve used the Producer Price Index for All Commodities as the deflator and Census Bureau’s mid-month population estimates to adjust for population growth. I’ve indexed the adjusted series so that 2007=100.

    Click to View
    Click to View

    The most recent data point in this adjusted series is fractionally off the interim high off the post-recession trough set in September (see the inset above). But it remains below the post-recession highs in 2009 and 2010.

    Note: I’m indebted to Bob Bronson of Bronson Capital Research for instructing me on the necessity of inflation and population adjustments to decipher of the Federal Reserve’s otherwise misleading Industrial Production data.

    The Generic Big Four

    The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have the three indicator updates for the 61th month following the recession. The Big Four Average is (gray line below).

    Print Friendly, PDF & Email