My US diffusion index continues to slide

 A diffusion index measures the percentage of time series one is monitoring which are rising or falling.  If a time series is rising, it scores 1, if it is flat, it scores 0.5, and if it is falling it scores 0.  The scores are then added up, and the result divided by the number of indicators available for that month.  It tends to lead the business cycle, because when 100% of all monitored series are rising, the economy is strong.  Gradually, one by one, indicators stop rising, usually well before the overall diffusion index reaches 50%, which marks the flexion point in the economic cycle.  In the same way, at the bottom of the cycle, one by one series turn up, until half the measured series are rising.  Because of this, a diffusion index tends to be a good leading indicator of the overall economy.

My US diffusion index is paired with my shorter-leading US index in the chart below.   The diffusion index is already below 50%, which would suggest that the economy is already in recession.  This seems doubtful to me -- current data suggest that the US economy is still advancing, just.  But it should go into recession next month (November) or the month after. 

Notice how the diffusion index had turned up before the covid crash hit, then rose sharply as it waned, in response to fiscal and monetary stimulus, and how it has been falling (even as the economy kept going) since late 2020.  

Post a Comment