|Q: How is the BaR Analysis Grid© useful?|
|A: The BaR provides unprecedented insights into how the business cycle unfolds and signals how near the economy is to a recession. The BaR not only plots key economic data, but also the sentiment of economic stakeholders: consumers, small businesses, credit managers, and purchasers. With this combination of crucial data and sentiment, the BaR clarifies current economic conditions and indicates likely near-term trends.
The BaR shows that the business cycle is composed of multiple mini-cycles. Too often, economic "experts" give dire warnings that the downside of each mini-cycle signals a pending recession. In reality, these are the normal ups and downs of a business cycle. The BaR distinguishes between expected, regular mini-cycles and the last fatal cycle that occurs before a recession.
Due to their simple formats, a quick glance of the BaR grid and Percent MoC from Baseline table on the homepage tell you more about economic conditions than hours of reading narrowly-focused, often contradictory, articles and analysis.
Lastly, another benefit of the BaR is that by mid-month 16 of its 19 indicators have been updated. This provides an update that is as "real time" as is possible with economic data. Experience shows that the MoC (mean of coordinates) generally shows modest change from the mid-month update until the end-of-month update, by which time all 19 indicators have been updated.
|Q: Does the BaR predict when a recession will start?|
|A: The BaR is descriptive, not predictive. Rather than predict if or when a recession may start, it shows when the economy has reached a point where a recession is likely to occur. As displayed on the BaR, recessions occur when the MoC is near the baseline. This is best understood by viewing the Road to Recession and the Business Cycle grids, found here and here, respectively.
Just as importantly, when the MoC is not near the baseline, there is no threat of an imminent recession.
The BaR shows the problem with most predictive models. When the MoC is not near the baseline, but economic growth is slowing, predictive models will show that the probability of a recession is increasing. In reality, unless the MoC is near the baseline, recession probabilities are not increasing. Rather, this is a normal part of business cycle, during which the economic growth slows, and accelerates, in a series of mini-cycles.
|Q: How do I read the BaR?|
|A: Click on the BaR Analysis Grid tab and scroll down to the How to Read the BaR section. Once understood, the BaR is easy to follow and understand.
|Q: What is an economics P.I.?|
|A: Econ P.I. is the name of this website. The name is intended to convey that facts are presented here, not opinion. The founder of Econ P.I. does not claim to be an economics P.I., as some well-intended individuals have suggested. Econ P.I. refers only to this website, not to an person.
|Q: What is the mean of coordinates (MoC)?|
|A: The most important point on the BaR is the MoC, the mean of coordinates, which is the average of all plotted points. It indicates the overall condition of the economy and the outlook of economic stakeholders. After a recession, the MoC will largely stay in the recovery quadrant. As the economy strengthens, the MoC will eventually reach the expansion quadrant and begin to move above the baseline, which is an approximate recession threshold. The economy is the strongest when the MoC moves upward and to the right.
However, it is not unusual for the MoC to move into the decline quadrant even when it has an overall positive trend. This may happen briefly when the economy is expanding but the rate of growth slows, which is not uncommon during a business cycle.
Importantly, when the MoC stays mostly in the decline quadrant and moves towards the baseline, this indicates the economy may be moving towards a recession.
|Q. Why do the indicators regularly swing between the expansion and decline quadrants?
|A. The graphic below illustrates how economic indicators with a positive trend line can swing between positive (green arrows) and negative (red arrows) rates of change. As all indicators have a tendency to hit new highs, and then stall or decrease slightly, indicators on a positive trend will predominately stay in the expansion quadrant, but will periodically move into the decline quadrant.|
|Q: Shouldn’t the economic indicators used on the BaR be weighted? Aren’t some indicators more important than others?|
|A: Each economic indicator used on the BaR has a “natural” weight in the real economy. For example, corporate profits are likely to have a significant influence upon other indicators. If a more influential indicator declines, its decline and its effect on other indicators will be captured on the BaR, mirroring what is happening in the economy.
In addition, analysis of historical BaR grids shows that the indicators that decline first prior to one recession may not do so before another recession. If heavily weighted indicators were slow to decline prior to a recession, this would defeat the purpose of the BaR.
Finally, every indicator plotted on the BaR is by itself a useful indicator. But, no one indicator (or a few indicators) is superior to the sum of all indicators, which is shown by the mean of coordinates (MoC).
|Q: Wouldn’t it be better to plot the BaR with fewer economic indicators?|
|A: The strength of the BaR is that it uses an array of indicators that represent all aspects of the economy, providing an accurate portrayal of recent economic activity and sentiment. All 19 indicators correlate well with the business cycle and have a history of declining prior to recessions. When the majority of the indicators move in one direction, it is a sure sign of changing economic conditions.
|Q: Often economic data is revised a month or two after it is released. Doesn't this affect how the BaR Analysis Grid reads from month to month?|
|A: Only six of the 19 economic indicators that are plotted on the BaR are subject to major revisions. Generally, not more than one or two see significant revisions during the same month. The key measure of the BaR is the MoC, which is the average of all plotted indicators. Even if several measures are revised in the following month, because the MoC is an average of all 19 indicators, its statistical change is generally not very significant.
|Q: What are the leading indicators that are tracked on the BaR and why are they tracked?|
|A: There are eight leading indicators tracked on the BaR. These leading indicators are relevant to the BaR as they show emerging trends. The indicators include: consumer sentiment, private building permits, small business optimism, nonfarm job openings, temporary employment, unemployment claims, St. Louis Fed Financial Stress Index, and yield curve spread (10-yr minus 3-month).
|Q: Are the months shown on the grids and charts the months in which the economic activity occurred or the months in which the activity was reported?|
|A: The BaR grids and Percent from Baseline tables show the month in which data updates are published by their sources. This better serves the purpose of the BaR and Percent from Baseline, which is to show the current condition of the economy as published data are available. For nearly all data sources, activity from one month is reported during the following month.
The business cycle grids display historical information. Consequently, the periods shown on the business cycle grids are when the economic activity occurred.
|Q: For 1Q 2019, why did the BaR show a decrease in the rate of growth while GDP increased 3.1%?|
|A: The BaR rate of change is influenced by sentiment measures and economic indexes. For this reason, it provides a useful perspective of changing economic activity and sentiment that cannot be obtained through GDP reports . During 1Q 2019, the BaR captured increased pessimism and lowered expectations among small business owners, consumers, credit managers, and purchasers. This is evident in the slowdown in consumer spending during the quarter.|