by Thomas Wash
The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities. We have created this report to keep our readers apprised of the potential for recession, which we plan to update 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.
Economic data released for May suggests the economy remains strong but is showing some signs of weakness. Currently, our diffusion index shows that 10 out of 11 indicators are in expansion territory, with several indicators approaching warning territory. The index currently sits at +0.818.
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 headed toward a recovery. On average, the diffusion index provides about seven months of lead time for a contraction and three months for a recovery. Continue reading for a more in-depth understanding of how the indicators are performing.
 The diffusion index looks slightly different from last month due to adjustments we made to the formula and revisions in certain data sets.