New Fed recession signal based on state growth

 

Economic dispersion matters or looking at more localized data and can be helpful with indicating the onset of a recession. The Philly Fed generates state coincident indices that look at key variables associated with state-level growth trends. (See how these are formed below.) 

The St Louis Fed took those numbers and then looked at the number of states with negative growth. If the number of negative states gets above 26, there is a likely recession signal. The current numbers are not looking good, but still below the threshold. However, we will note that the inputs are subject to revision so there is noise with the count each month. Nevertheless, this is a simple recession indicator that can easily be tracked and serve as another recession signal.

Briefly, the SCIs are calculated with a dynamic single-factor model using each state’s nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements (deflated by the U.S. city average consumer price index). Each state’s SCI trend is also set to match the long-term trend of its gross domestic product (GDP). In other words, for each state, the long-term growth of its SCI matches the long-term growth of the state’s GDP.