US Economic Health

Current Summary

Updated: 8/2/2016

AS OF THE END OF THE MONTH- JUN, 2016:

BIG 4: THE US ECONOMY IS EXPANDING MODERATELY.

RISK 4: FINANCIAL RISKS IN THE US ECONOMY ARE SLIGHTLY LOW.

MASTERPHASE: US ECONOMIC ACTIVITY IS IMPROVING SLOWLY.

* CONTINUE READING FOR MORE INFORMATION ABOUT ASSUMPTIONS AND ANALYSIS

Background

A technical analyst works with price and volume data to interpret activity in the financial markets. Thus, a technical analyst is just a type of data analyst. Applying simple techniques practiced with monitoring market activity to the fundamental data published by the Federal Reserve and its various branches yields some useful insight into the underlying health of the US economy. I will use publicly available FRED data from the STL FED in this analysis.

US ECON HEALTH- The BIG 4, the RISK 4, and the MASTERPHASE Index

The Big 4

The idea for tracking the so-called "Big 4" comes from Doug Short at advisorperspectives.com.The Big 4: Industrial Production (INDPRO), Real Personal Income (RPI), Nonfarm Employment (PAYEMS), and Real Retail Sales (RRSFS), are considered to weigh heavily on official recession calls. The data is complete as of the end of the month shown in the chart title: "Fundamentals: BIG 4- (MONTH)"



Explanation- In order to compare the data, I have charted the data using z scores starting January 2005.  The second graph, AVG4, is an average of the Big Four as well as a 4 month moving average of that average. The average and the SMA(4) of the average is useful for spotting trend.  As long as the AVG > SMA(4), then the BIG 4 are increasing.

Verdict: The AVG > SMA(4) and the rate of change for the AVG is positive. As of the end of the month of JUNE, 2016, the US economy is EXPANDING MODERATELY.

The RISK 4

Another approach to monitoring economic conditions uses what I call the RISK 4 from FRED data. The RISK 4 are the St. Louis Fed Financial Stress Index (STLFSI), Kansas City Fed Financial Stress Index (KCFSI), Chicago Fed National Financial Conditions Index (NFCI), and the Cleveland Financial Stress Index (CFSI). The Data is complete as of the end of the month shown in the chart title: "Fundamentals: RISK 4- (MONTH)"



Explanation- Each data set is scored such that a value greater than zero indicates significant financial stress, while less than zero indicates the opposite, low financial stress. 

As you can see, during the 2008 financial crisis, these indexes all spiked above zero in  September 2007 as credit conditions and bank health deteriorated. Again, I have plotted an average of all four indexes. 

Verdict: The AVG is less than zero. As of the end of the month of JUNE, 2016, financial risk in the US economy is SLIGHTLY LOW. 

The MASTERPHASE INDEX

I combined the BIG 4 and RISK 4 into one data set to create the MasterPhase Index. I also included a 3-month and 6-month moving average to smooth the raw data. The data is complete as of the end of the month shown in the chart title: "Fundamentals: MASTERPHASE- (MONTH)"

Explanation- I reworked and combined the input data sets, so both the BIG 4 and RISK 4 are combined into one score. A MasterPhase value greater than zero indicates the US economy is currently improving. A score less than zero indicates the economy is deteriorating, with a high risk for a recession. 

As you can see, prior to the 2008 financial crisis, the MasterPhase Index first went below zero at the end of August 2007. The SMA(3) followed in October and the SMA(6) went below zero with the November 2007 data included. 

Verdict: The score is currently above 0. As of the end of the month of JUNE, 2016, and based on the current rate of change in this measure, the US economy is IMPROVING SLOWLY.

***As always, take this data as you see fit considering this website's terms and conditions. 

Limitations of this Analysis

However, there are drawbacks to working with economic data. While technical analysts have the freedom to use a variety of time scales- daily, weekly, monthly, 30 minute, etc...time periods which are current as soon as the time period completes (daily data is complete as soon as the markets close for the day), fundamental data is limited by its publication periods. Unfortunately, most of the important US economic data is published "long" after the time period it measures. For instance, Real Personal Income, the most delayed data set I will be using, publishes in the first week of the 2nd month after the month it tracks has completed. So, Real Personal Income stats for January publishes in the first week of March.

Therefore, it is important to remember that the following data analysis is always delayed- it lags the real state of the economy by about a month in most cases. Nonetheless, the data is useful for catching economic slowdowns before they are dominating all the headlines. For instance, you would have been tipped off that the economy was entering a recession by December 2007 from data from October 2007, before the stock market began its major sell off over 2008.

Further Info:

 For the Big 4, the possibilities are either "Expanding" or "Contracting" at the rate of slowly, moderately, or quickly. For the Risk 4, the possibilities are either "High" or "Low" and can be designated slightly, moderately, or extremely. Finally, the MasterPhase possibilities are "Improving" or "Deteriorating" at the rate of slowly, moderately, or quickly.