by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index improved slightly in May but continues to signal that a recession is close. The latest report showed that six out of 11 benchmarks are in contraction territory. The diffusion index rose from -0.3333 to -0.2121 but still sits well below the contraction signal of +0.2500.

• Equities rebounded despite financial conditions remaining tight.
• Residential construction spiked but the goods-producing sector remains weak.
• Labor markets appear to be strong but the number of unemployed workers is starting to climb.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report