The Actual State of the US Economy
At last, I have some time to write in my blog again. Nowadays I am starting to monitor the US economy more frequently as I am reading news like trade wars, interest rate raises, flat yield curves, shutdowns and similar red flags that can or can't affect the economy but also the duration of the current economic cycle and of the bull market has been large enough to start paying more attention. Although I live in Mexico for me its very important how the US economy is evolving because that has a huge impact in the Mexican economy as well.
I had developed some proprietary indexes and models to track the US economy and the stock market specifically the S&P500. Today I will review them and make some conclusions that are valid for this particular moment.
The first indicator is the Weekly Economic Health Index which I created inspired in the Aruoba-Diebold-Scotti index but I also added additional high frequency series (weekly) that can show the psychological status of the economic participants therefore I mixed economic and financial indicators.
There is a key level of 55% where anything above this value will be considered that the economy is in expansion and there is no recession mind state in the aggregate economic participants.
Source: My own calculations, Yahoo Finance, NBER, St Louis FED FRED
As of February 16th of 2019 the value of the Weekly Economic Health Index was 71% which is much higher than 55% therefore this first indicator is telling us that the economy is growing and it appears to be that we are in expansion.
I am also trying to find fundamental signals that will help me detect or forecast big spikes in volatility that is why I am comparing the Weekly Economic Health Index with the VIX. I don't think I can get clear signals, if I use the aforementioned index I can get also false positives.
Probability of US Recession
Source: My own calculations, NBER
With calculations from December 2018 and January 2019 I can say that the probability of a recession is between 5.65 - 11.30%. To predict a recession I need to see this indicator jumping to at least 40%, as of the moment I haven't seen that. It appears to be that at least for the next 6 months I don't see a recession coming.
This indicator is not only based in the interest rates yield curve and in fact is composed of 9 different models using different independent variables structures as inputs with this method I am trying to get the probability from different approaches.
Probability of a Bull Market State in the S&P500
Source: My own calculations, S&P500 Index from ^GSPC Yahoo Finance
The contrarian approach works better from the bear to the bull market state regime transition. For the other way around you need to see a significant downward movement of the probability and still being in a peak in the S&P500 (what I would call a divergence).
The signal in my opinion will be seen once I see a jump to a probability of 40% during a peak.
I can conclude that economy is still in good shape but we will see that in the coming months.
Well please comment on this.
Thanks,
Humberto Aguilar
Disclaimer:
Please consider that I am not recommending buying or selling any type of securities nor taking any other kind of action. The analysis shown in this article is for pure intellectual entertainment and are my views and opinions. The usage to the information given in this article and blog is the whole and own responsibility of the reader.
