This update will analyze the current and projected states of financial markets and the broader economy.
Recession / Expansion Index
My Recession / Expansion Index, created with the use of 14 leading economic indicators, is indicating we have descended slightly from expansionary conditions in the medium-term to rather neutral economic conditions in the medium-term (Note: "Medium-Term" refers to the six to nine month outlook period, from June). The index remains in weak expansion territory in the sense that it is above the zero-line, but there is no longer a strong signal in favor of expansionary economic conditions in the 6-9 month timeframe.
The probability of an NBER-defined recession occurring in the next six months, derived from this index, is 0.00%, down from 4.40% in May 2017.
Below is a historical look at the Recession / Expansion Index to show its worth in anticipating prior recessions.
Financial Stress Index
My Financial Stress Index, created with an emphasis on the bond market, rose to a value of -5.066 in the week ended August 11, 2017. This is an increase from -5.204 in the week ended August 4, 2017. Values below -2.500 indicate "loose" monetary policy as implied by financial markets, while values above 2.500 indicate "tight" monetary policy. As such, we remain in a period of very accommodative financial conditions in the United States.
Below is a historical look at my FSI to show its worth in anticipating tighter financial conditions:
Excess in the Stock Market
My "excess" indicator, which measures the stock market against economic data in order to identify when stock markets are no longer underpinned by the associated economic data, does not signal "excess" (may also be referred to as a "bubble") for the month of June 2016. While data for July 2017 is shown here, not all economic data sets for the month have been input yet, and thus the value is subject to change. At the current trajectory, we may reach a signal of "excess" in the stock market in roughly six months, but of course this is subject to potentially drastic change.
Below is a historical look at the Excess Indicator to show its worth in showing periods of "excess" or "bubbles" in the stock market:
To summarize:
• Recession / Expansion Index: Neutral - weakly expansionary conditions expected in the medium-term.
• Financial Stress Index: Highly accommodative monetary policy continued in the week ended 8/11/2017.
• Excess Indicator: Stock markets were not showing potentially significant levels of "excess" in the month of June 2017, and are not expected to show "excess" in July 2017.
Andrew
Recession / Expansion Index
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| Source: Author |
The probability of an NBER-defined recession occurring in the next six months, derived from this index, is 0.00%, down from 4.40% in May 2017.
Below is a historical look at the Recession / Expansion Index to show its worth in anticipating prior recessions.
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| Source: Author |
Financial Stress Index
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| Source: Author |
Below is a historical look at my FSI to show its worth in anticipating tighter financial conditions:
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| Source: Author |
Excess in the Stock Market
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| Source: Author |
Below is a historical look at the Excess Indicator to show its worth in showing periods of "excess" or "bubbles" in the stock market:
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| Source: Author |
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To summarize:
• Recession / Expansion Index: Neutral - weakly expansionary conditions expected in the medium-term.
• Financial Stress Index: Highly accommodative monetary policy continued in the week ended 8/11/2017.
• Excess Indicator: Stock markets were not showing potentially significant levels of "excess" in the month of June 2017, and are not expected to show "excess" in July 2017.
Andrew
