US Market report
the fourth-quarter report on US economic activity brought one genuinely surprising element: the strength of the increase. However, the positive directional bias has been evident for weeks, if not longer, for those who have been analyzing a wide range of indicators and avoiding rookie mistakes in estimating recession risk.
For those who constantly forecast recessions, the 3.3% rise in output in Q4 dealt another blow to their ongoing warnings of imminent trouble. The GDP advance exceeded expectations by a significant margin, as the consensus forecast was only 2%. While economic activity did slow down compared to Q3, the exceptional surge in the third quarter was an unsustainable outlier.
Precisely predicting or nowcasting GDP data points is challenging, but there are econometric tools available for estimating recession risk in real-time and in the near term, which offer more reliable insights.
Unfortunately, the wider analytical and media spheres tend to favor weak models and sensationalist commentary. Thankfully, there is a better approach.
Once again, CapitalSpectator.com’s modeling on estimating US recession risk has proven successful. Over the past nine months, this modeling—regularly updated and reviewed in The US Business Cycle Risk Report—has consistently indicated a low probability of an NBER-defined recession. This accuracy is not mere luck.
The reason behind this success lies in the systematic analysis of a diverse range of indicators and a thorough review and processing of the results from multiple angles. This approach is far more effective than the common practice of cherry-picking from so-called infallible recession predictors.
At the heart of this methodology is an empirical fact that has been verified in numerous studies and real-world experiences over decades: combining forecasts and nowcasts from several sources, ideally representing different modeling techniques, produces superior results.
Last year provided yet another demonstration of the power of ensemble models that carefully incorporate multiple indicators and models.
For example, in late May 2023, CapitalSpectator.com highlighted an excerpt from The US Business Cycle Risk Report, which advised that recession risk remained low. The Composite Recession Risk Index (CRPI), calculated from 14 diversified economic and financial data sets, indicated a less than 10% probability of a recession at that time.
While recession forecasts seemed to be emerging from every corner, a comprehensive examination of the numbers consistently failed to support the pessimistic outlook—a recurring theme in my modeling throughout 2023.
The positive macro signals also extended to proprietary modeling that cautiously looks ahead to the near future, typically 2-3 months, which is the limit for high-confidence forecasting of US business cycle risk.
Meanwhile, the perennial recession forecasters never admit defeat. Instead, they keep pushing their estimates of contraction further into the future until, eventually, they appear to be right.
While this strategy may be effective for gaining publicity, it is detrimental to investors and business owners seeking to make informed decisions about the business cycle outlook.
Fortunately, there is a better way. On that front, the outlook remains optimistic. The Jan. 21, 2024 estimate of CRPI from The US Business Cycle Risk Report indicates continued positivity.
