By James Picerno, Director of Analytics
It’s been clear for weeks that economic growth is slowing due to the resurgent coronavirus. A clear sign of the change in the macro trend emerged in yesterday’s update of the ADS Index, the Philadelphia Fed’s real-time business cycle index.
The catalyst: the Labor Department yesterday reported a sharp rise in new filings for unemployment benefits for the week through Dec. 5. Jobless claims increased to 853,000 last week – the highest count since September.
“This recent surge suggests that claims are not just stagnating, they’re actively worsening,” says Daniel Zhao, senior economist at Glassdoor, a job-placement consultant. “The surge in initial claims is especially concerning when claims are still above levels near the peak of the Great Recession.”
The bigger-than-expected gain in claims took a bite out of the ADS Index, which was revised down to -0.297 (for the economic profile as of Dec. 5). The negative print marks the first subzero reading since May. The current reading still reflects growth, per any number above -0.80 (a threshold identified by economist Òscar Jordà at the San Francisco Fed). The recent downside momentum, however, isn’t encouraging and so breaching that tipping point on the downside appears increasingly likely in the weeks ahead.
For the moment, the implied recession probability via the ADS Index is a modest 14%. That’s noticeably higher vs. recent readings, but estimates below 50% suggest that a strong growth bias prevails.
Unfortunately, the coronavirus is raging again and a widespread rollout of a vaccine is still months away. No wonder, then, that economists are downgrading expectations.
“The US economic recovery is likely to slow further before the impact of expected approvals of Covid-19 vaccines makes itself felt in the second quarter of 2021, according to Wall Street Journal survey published this week. “In the latest monthly survey of business and academic economists, forecasters slashed their projections for economic growth and job creation in the first quarter, amid a surge in coronavirus cases.”
It’s unclear if the US is headed for a new recession or slower growth. Regardless, it appears that softer growth is a high-probability forecast relative to the outlook from, say, a month earlier.
Keep in mind that the ADS Index is a volatile benchmark that’s prone to hefty revisions vs. slower-moving but generally more reliable business-cycle metrics, such as the monthly numbers for the Chicago Fed National Activity Index. The advantage that the ADS numbers offers is a potential for early signals of trend changes. But as usual with ADS data, the latest results come with a relatively hefty dose of uncertainty. Nonetheless, as long as the coronavirus data worsens, the deterioration of the ADS Index looks like a reasonably accurate approximation of actual economic conditions.
(An earlier version of this article first appeared at The Capital Spectator.com on December 11, 2020.)