As detailed in previous posts (e.g. here), my US recession probability indicator peaked just below the 50% “trigger” level in late 2007. The suggestion was that the economy would be very weak in late 2007 / early 2008 but would just skirt a contraction, as defined by the official arbiter, the National Bureau of Economic Research (NBER).

Two months ago 76% of economists surveyed by the Wall Street Journal believed a recession had started. A new survey published today showed the percentage down to 52%, reflecting recent better-than-expected data.

The NBER places particular emphasis on five indicators in determining whether and when a recession has started: GDP, personal income, employment, industrial output and business sales. GDP is regarded as the single best measure but official figures are available only quarterly. Of the four monthly indicators, the NBER assigns greater weight to personal income and employment because they cover the whole economy rather than just the goods sector.

GDP is currently estimated to have grown at annualised rates of 0.6% and 0.9% respectively in the fourth and first quarters. However, these figures could change significantly when annual revisions are published next month. So it is important to track the other four NBER indicators in judging the likelihood of an official recession determination.

The chart below compares recent movements in a composite index of the four indicators with its behaviour during the last seven NBER-defined recessions. The index is derived by rebasing each indicator to equal 1 in the month of a NBER cycle peak and calculating a weighted average. Reflecting their whole-economy coverage, personal income and employment are assigned a 30% weight versus 20% for industrial output and business sales. The current cycle is measured from October 2007 – the latest peak month for the composite index.

The minimum peak-to-trough fall in the index during the last seven recessions was 1.6% (in 2001). It is reasonable to assume this threshold must be reached for the NBER to call a recession now. As at April, the decline from October stood at 0.6%. So the index is consistent with the message from the latest GDP estimates – the economy is not yet sufficiently weak to warrant a recession determination.

My recession probability indicator is giving an “all-clear” signal for late 2008, based on falls in real interest rates and a steeper yield curve, which are judged to outweigh tighter credit conditions. It may be underestimating the negative impact of recent further energy price gains but I continue to expect the US economy to perform better than many fear in 2008, with greater risk of disappointment in Europe. 2009 may be another story, however.