Economic Strength Index

Economic Strength Index Overview

The Economic Strength Index (the “ESI”) is designed to reveal turning points in the economy and forecast recessions, as defined by the National Bureau of Economic Research (NBER).

The ESI is constructed as the 9-month growth rate of the Aggregate Economic Index (as defined below), expressed as a percentage. A signal of 0 commonly aligns with the beginning of a recession in the US economy. A crossing of the ESI below 5.0 has historically resulted in a recession within the next year with 95% certainty.

The current value of the ESI is 0


Aggregate Economic Index Overview

Forecasting recessions remains challenging due to the dynamism of the US economy. However, being able to do so is critical for investment decisions - such was the motivation behind formulating the Aggregate Economic Index.

The Aggregate Economic Index (the "AEI") is a composite score that summarizes the overall economic activity of the US economy and is intended to quantify long-term economic output while identifying local peaks and troughs in the economy that typically demarcate individual business cycles.

The AEI is calculated using ten economic data sets sourced from FRED and the combined formulation provides a clearer picture than any one single component. The ten components of the AEI are:






Recession Forecasting Using This Tool

The ESI was designed to provide a relative strength (or weakness) of the economy and provides high probability recession forecasts (based on historical performance) that are easily discernible to a reader.

With machine learning, analysis can be taken one step further by using the Indexes to forecast the specific likelihood of the onset of a recession in the short-term. Below is one such example of that analysis, where the likelihood of a recession beginning in the next six months is forecasted and plotted historically.

At present, the US economy is not likely to enter a recession within the next six months. This characterization is determined by the forecast value being above or below 75%, as this method has never exhibited a false positive above this level during the measurement period (1976 – present).
 

As of the publication date, the current likelihood of a recession occurring in the US economy over the next six months is shown below.