Business Cycle Report (November 27, 2019)

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.

In October, Q3 earnings came in stronger than expected, the Federal Reserve cut rates for a third time this year and the U.S. and China continued to negotiate what is being called a “phase-one” trade deal. Meanwhile, the manufacturing sector continued to show signs of weakness and consumer confidence slowed. Currently, our diffusion index shows that seven out of 11 indicators are in expansion territory, with several indicators approaching negative territory. The index for October fell 60 bps from +0.575 in the prior month to +0.515.

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 is currently providing about six months of lead time for a contraction and five months of lead time for a recovery. Continue reading for a more in-depth understanding of how the indicators are performing and refer to our Glossary of Charts at the back of this report for a description of each chart and what it measures. A chart title listed in red designates that indicator is signaling recession.

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