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 increased from the previous month, suggesting that economic conditions are improving. The January report showed that six out of 11 benchmarks are in contraction territory. Last month, the diffusion index increased from a revised +0.0303 to +0.0909,[1] slightly above the recovery signal of -0.1000.

• Hawkish Fed talk led to an increase in interest rates in long-term bonds.
• Consumer confidence remains buoyant despite elevated inflation.
• Jobs data reinforces views that the labor market is tight.

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.

[1] The index has been revised due to a discontinued dataset. Under the old methodology, the value would have increased from -0.1515 to -0.03030. While the change is significant, the unrevised value is still above the contraction indicator.

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