SuperIndex Primer

This page is a quick overview (primer) of the SuperIndex components in the weekly Recession Forecasting Ensemble (RFE) report, which is one of 9 reports we publish. To see recent examples of the other 8 reports we publish, go to the OUR SERVICE menu. There are detailed descriptions inside the SuperIndex report that explain each chart in detail (a built-in user-guide.) The highly unique, intuitive report layout and style was the result of a comprehensive 4-month consultation with seasoned financial advisers,  fund managers and brokerage firms. There are 12 main sections to the  weekly published SuperIndex  report and we just highlight 7 of them below. You can download the full report at the bottom of the page or download a more recent sample in the OUR SERVICE menu.

1. SuperIndex construction

The “short-leading” and “co-incident”  Weekly SuperIndex composites are two of the six components of the Recession Forecasting Ensemble and are constructed from weighted averages of 9 underlying well-known leading and co-incident composite indexes available in the public domain, namely :

  1. Philly Feds’ Aurora Dieboldt Scotti Business Conditions Index (ADS),
  2. Philly Feds’ Business Outlook Survey (BOS),
  3. e-forecasting.com eLEI,
  4. e-forecasting.com Monthly GDP (eGDP)
  5. The Conference Board U.S LEI,
  6. The Conference Board Employment Trends Index (ETI),
  7. Chicago Fed National Activity Index (CFNAI),
  8. ECRI Weekly Leading Index (WLI),
  9. ISM Purchasing Managers Index (PMI)

The SuperIndexes serve as comprehensive “real-time” views on the U.S Economy from varying aspects as they are updated 21-25 times per month as the underlying data become available. A “Flash Forecast” is emailed to clients each Thursday to give them a “leg-up” on the ECRI WLI publication the following day. Using 9-factor multivariate recession probability models, a detailed Weekly Recession Forecast is published every weekend for subscribers. The models make definitive calls to the start/end of NBER recession dates, up to 12 months before the National Bureau of Economic Research (NBER ) themselves proclaim these dates. The NBER is the official arbiter of U.S recessions, but they often proclaim recession starts and ends 12-18 months after they have occurred, which is too late to be useful to the stock market participant.

Our short-leading SuperIndex recession signals give on average 3 months real-time advance warning of U.S recession. These warnings precede peak-to-trough drops on the US stock markets of 30% on average  since 1967 as shown below with the last two U.S recessions where probability of recession (ranges from 0 to 1 on left axis) within 3 months (black line) and hard recession calls (red line) are displayed together.

When the probability of recession within 3 months rises above the green dotted line, we call a recession.We provide “hard calls” to recession starts and ends as we understand how frustrating it is to decide what to do when faced with a “60% probability of recession”. And with many observers agreeing that the age of the “Great Moderation” is over and that recessions are most likely going to revert back to occurring once every 3-4 years, recession forecasting and risk management is going to be increasingly important to stock market participants. RecessionAlert’ s 9-factor short-leading recession models capture up to 99% of all historical recession months since 1967 with zero false positives.

2.Dashboard

The SuperIndex is made up of 9 composite leading and coincident indices available in the public domain. There is a Dashboard showing the recession probability status of each of the  9 components. When the needle is in the red it means that particular indicator is in recession territory. The top left gauge gives overall probability of recession within 3-4 months, when all 9 models are combined together into a multi-factor probability model.

SuperIndex Component Dashboard

3.History

You can also view the long term history of the Leading SuperIndex and its associated probability of recession & recession calls. The leading SuperIndex below is representative of future U.S economic growth and when it drops below the red recession dating line, it warns of recession in 3-4 months time. The Leading SuperIndex forms the basis of our “Short Leading” recession and economic indicator.

Leading SuperIndex History

4.Tracking the Expansion/Contraction

During economic expansion, we track the progress of the co-incident SuperIndex versus all prior recessions to gauge relative  strength of economic growth (weak growth leaves us vulnerable to external shocks) and risks of approaching the peak of the economic cycle (for market timing purposes.) During contraction, we perform the same task to gauge relative weakness of the contraction and the odds of approaching an economic trough.

Tracking the U.S Economy

5.GDP Forecasting

The co-incident SuperIndex is highly correlated to economic metrics such as GDP and can thus be used for forecasting. The image below shows how we forecast and track GDP. The instructions of how this works is shown in the text box to the right of the charts. These description boxes are embedded throughout the Recession Forecast Report so that you never need to consult a user-guide or help screen when attempting to interpret charts.

Forecasting Real GDP with SuperIndexes

6. Weekly Update Schedule

A very unique aspect of the US Economic Growth SuperIndexes is that they are “real-time” and are updated up to 21 to 24 times per month according to a fixed schedule as shown below when the underlying data becomes available. The example shows the month of May 2012 and each respective week is surrounded by a border line. We send a “Flash Update” to clients on late Thursday morning to give them a “jump-start” on the rest of the market relying on the ECRI WLI being published the following day, and the final report is issued every Friday.

Data age ranges from a mere 2 weeks old (weekly claims component of ADS, GDP 1st & 2nd estimates, ECRI-WLI) or 1-month old for most of the rest. ADS uses quarterly GDP which is the “most stale” information used, but this is countered with the use of the monthly eGDP estimates as a separate component. The eLEI and eGDP components are unique in that all of their competing peers available in the market show data a quarter (3 months) old whereas they are monthly estimates – providing for more real-time characteristics. This ensures you get more timely up-to-date status of the US economic index and recession probability to act in a timely fashion or ahead of the retail investing herd.

The schedule demonstrated above changes on a monthly basis depending on weekends, holidays etc. The table gets changed in the last week of the month to reflect the next months update schedule. Lightly shaded components have been published and included into all the relevant SuperIndex and RFE models. The important leading indicators are highlighted in orange. The CHANGE column highlights the change the respective factor/indicator has imparted on the SuperIndexes compared to the prior reading. DOWN means it has pulled the SuperIndexes down, raising the probability of recession. UP means the component had a positive effect on the SuperIndexes, lowering the probabilities of recession. FLAT means the sub-component made virtually no change.

7. Recession Forecasting Ensemble (RFE) Models

In addition to the Leading SuperIndex discussed above, for PRO subscribers there is a section in the report showing the status of the other Recession Forecasting Ensemble (RFE) components. There is the Headwinds Index, the Anxiety Index, the SuperIndex co-incident indicator, the SuperIndex Diffusion Index and the SuperIndex Recession Syndrome Index.  You can view descriptions and samples of these at the Recession Forecasting Ensemble and US Market Timing research page.

8. Weekly Readings and Historical Time Series

Subscribers also receive a weekly SuperIndex and probability time-series with chart as displayed below. They can then  incorporate the weekly time series data into their own models and forecasts. Subscribers to the Professional service plan also get a monthly historic time series of all the 6 RFE components.

SuperIndex Weekly Readings and Time Series

9. Download Sample Weekly Recession Forecast Report

You can download all the recent no-obligation sample reports from the OUR SERVICE menu.  Should you then wish to subscribe to the service simply navigate to the Subscribe page on our website. To read the reports you need the free Adobe PDF Reader