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What does recovery look like?

Posted: May 15, 2013 using data as of April 30, 2013 (Originally published: September 16, 2009)
Updated: Monthly

Conditions may be improving, but when and how is the recovery likely to happen? Our forecasts are designed to anticipate changes before they occur and to help you extract meaning from the noise.

All aboard the bullish train?

The April employment report, which featured a 51,000 job revision to the initially–reported March gain of only 88,000 nonfarm payroll jobs, worked wonders in U.S. financial markets to dispel fears of a fourth consecutive second–quarter stumble in the economy. Based on the most recent Business Cycle Index reading, Russell's take is to be bullish on the sturdiness of the U.S. economic expansion with U.S. real GDP growth near 2.5% but to recognize at the same time that not all of the near–term effects of sequestration spending cuts are captured by the model.

Business Cycle Index

Business Cycle Index Chart

Current reading and trend
  • The Business Cycle Index is expected to remain near 1.2 standard deviations above zero through February 2014.
  • The economy appears poised for modest growth in 2013, with our year-on-year forecast of 2.0% real GDP growth this year.

Source: Recession dates from National Bureau of Economic Research

Out of sample forecasts were calculated by simulating the time-series model into the future. The value shown is the median of the simulated value for the month.

Employment Changes

Employment Change Chart

Current reading and trend
  • Early this year, Federal Reserve policymakers talked of 200,000 jobs per month as the benchmark. Russell's latest employment forecasts suggest that this benchmark might finally be relevant by the end of 2013.
  • We expect monthly jobs gains to average 195,000 during 2014.

Source: Actual employment data from St. Louis Fed's FRED database

Out of sample forecasts were calculated by simulating the time-series model into the future. The value shown is the median of the simulated value for the month.

Forecast vs. Actual Data

Employment Comparison Chart

Track record of employment changes

In order to help you evaluate the Business Cycle Index, we want to show you how the forecast has performed relative to actual data. The orange lines shows the employment data that was available in December 2008 (solid) and the model's prediction for employment changes based on that data (dashed). The blue lines represents the most recent employment data (solid) and the model's current prediction for employment changes (dashed). These two sets of lines can be used to evaluate the accuracy of the model's December 2008 prediction. You may notice that revisions to the employment data have occured since December 2008, which is why the solid orange line and the solid blue line do not overlap.

Source: Actual employment data from St. Louis Fed's FRED database

Frequently Asked Questions

What is the Business Cycle Index?

  • Created by Russell's Chief economist for North America, Mike Dueker, the Business Cycle Index (BCI) forecasts the strength of economic expansion or recession in the coming months, along with forecasts for other prominent economic measures.
  • The two outputs featured here are the Business Cycle Index and the Employment Forecast.
  • Inputs to the model include non-farm payroll, core inflation (without food and energy), the slope of the yield curve, and the yield spreads between Aaa and Baa corporate bonds and between commercial paper and Treasury bills. A different choice of financial and macroeconomic data would affect the resulting business cycle index and forecasts.
  • "Dynamic forecasts of qualitative variables: A Qual VAR model of U.S. recessions", published in the Journal of Business and Economic Statistics in January 2005, provides background on the statistical model behind the BCI.
  • The ongoing track record of the BCI forecasts is available under the "Forecast vs. Actual Data" tab above.

Why is it important?

  • The BCI forecasts the future direction of the business cycle.
  • Historically, the stock market responds to investor perceptions of the future direction of the business cycle.

Can I use the BCI as a market timing tool?

  • No. The BCI is not meant to serve as a direct prediction regarding the future performance of any financial market. It is not intended to predict or guarantee future investment performance of any sort.

How do we interpret it?

  • An increase in the BCI indicates that the business cycle conditions are improving — either moving closer to exiting a recession or to stronger expansion.
  • A decrease in the BCI indicates that business cycle conditions are worsening — either moving closer to entering a recession or to a deeper recession.

How often is it updated?

  • The Business Cycle Index is updated monthly after payroll employment numbers are released and will be published on Helping Advisors by the 15th.

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Important information and disclosures

These macroeconomic forecasts do not constitute a projection of the stock market or of any specific investment.

Historical employment data displayed in the Business Cycle Index are reflective of current data as provided by the data sources including any revisions to previous data. These revisions may change historic data points and historic ranges for some or all indicators. These changes are usually due to seasonal adjustments to previously supplied data.

The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. It is not intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Anyone using this material should consult with their own attorney, accountant, financial or tax or consultants on whom they rely for investment advice specific to their own circumstances.

This analysis is not meant to serve as a direct prediction regarding the future performance of any economic or financial market. Similarly, they are in no way intended to predict or guarantee future investment performance of any sort. Other economic or financial market indictors not considered in this analysis may produce different results.

This analysis represents an economic analysis utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This is not an offer, solicitation or recommendation to purchase any security or the services of any organization.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.

No investment strategy can guarantee a profit or protect against a loss in a declining market.

Standard Deviation is a statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.

Russell Investment Group, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

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Copyright © Russell Investments 2013. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

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First used September 2009
Revised May 2013
RFS 10741