Here's what the 4 official recession indicators look like right now

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:

• Nonfarm Employment
• Industrial Production
• Real Retail Sales
• Real Personal Income (excluding Transfer Receipts)

The Latest Indicator Data

Nominal Retail Sales in December declined 0.11% (rounded to -0.1%). Real Retail Sales, calculated with the seasonally adjusted Consumer Price Index, came in at 0.0% month-over-month (rounded from 0.001%). The chart below gives us a close look at the monthly data points in this series since the end of the last recession in mid-2009. The linear regression helps us identify variance from the trend.

Advisor Perspectives

The early 2014 dip in sales was generally written off as a temporary result severe winter, and the return to trend sales growth gave credence to the explanation. The early 2015 dip triggered the same explanation, but following the subsequent recovery, Real Sales have risen below trend.

The Generic Big Four

The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.

Advisor Perspectives

Current Assessment and Outlook

The US economy has been slow in recovering from the Great Recession, and the overall picture for 2015 has been a mixed bag. Employment and Income have been relatively strong. Real Retail Sales and and especially Industrial Production have been distressingly weak. Real Retail Sales have hovered around a flat line for the past five months. As we can see in the chart below, the average of the Big Four is what we would expect for an economy slipping into recession.

Advisor Perspectives

The next update of the Big Four will be for Industrial Production.

Background Analysis: The Big Four Indicators and Recessions

The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, we've plotted the same data using a "percent off high" technique. In other words, we show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is our four-pack showing the indicators with this technique.

Advisor Perspectives

Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions.

Rather than having four separate charts, we've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See the note below on recession boundaries).

Advisor Perspectives

The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.

As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.

Now let's look at the 1972-1985 period, which included three recessions — the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).

Advisor Perspectives

And finally, for sharp-eyed readers who can don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.

Advisor Perspectives

History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.

Advisor Perspectives

The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been upward, although we have that strange anomaly caused by the late 2012 tax-planning strategy that impacted the Personal Income.

Here is a close-up of the average since 2000.

Advisor Perspectives

NOW WATCH: 4 lottery winners who lost it all