Business Cycle Report (July 27, 2023)

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index continues to improve but is still signaling a possible recession. The June report showed that six out of 11 benchmarks are in contraction territory. Last month, the diffusion index rose from -0.2121 to -0.1515, slightly below the recovery signal of -0.1000.

  • Tech stocks, particularly those associated with artificial intelligence, provided a boost to equities.
  • Construction activity waned; however, other measures of the real economy remained mixed.
  • Employment indicators suggest that the labor market is tight.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report