Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
The Latest Indicator Data
According to the Federal Reserve:
Earlier today the Federal Reserve released its annual revisions to Industrial Production. Prior to the revisions, Industrial Production had risen 26.2% since the end of the Great Recession in June 2009. The revisions trim the rise to 22.8%. The indicator is -0.74% off its nominal high in December of last year, down from -0.55% before the revisions. Here is an overlay of pre-and post-revision series over this timeframe.
The charts below have been updated to incorporate the revisions.
In some respects, Industrial Production is the least useful of the Big Four economic indicators. It's a hodge-podge of underlying index components and subject to major revisions, which undercuts its value as a near-term indicator of economic health. As a long-term indicator, it needs two key adjustments to correlate with economic reality. First, it should be adjusted for inflation using some sort of deflator relevant to production. Second, it should be population-adjusted.
The chart below is another way to look at Industrial Production over the long haul. It uses the Producer Price Index for All Commodities as the deflator and Census Bureau's mid-month population estimates to adjust for population growth. We've indexed the adjusted series so that 2012=100.
Note that the recent rise in this adjusted indicator is largely a result of a deflationary trend in the All Commodities Price Index that began in mid-2014, as we can see in this snapshot.
We're indebted to Bob Bronson of Bronson Capital Research for pointing out the value of inflation and population adjustments to decipher the Federal Reserve's otherwise misleading Industrial Production data.
Capacity Utilization
The Fed's monthly Industrial Production estimate is accompanied by another closely watched indicator, Capacity Utilization, which is the percentage of US total production capacity being used (available resources includes manufacturing, mining, and electric and gas utilities). In addition to showing overall economic growth and demand, Capacity Utilization also serves as a leading indicator of inflation.
