January 29, 2024 (December data)
Welcome to 2024 and a busy week for the economy. A GDP release that closes out 2023. A Federal Reserve meeting. And we’ve entered an election year. Many will be taking the latest GDP release, which had an initial estimate of Q4 real GDP growth come in at 3.3%, as a positive signal for the economy. This also appears to be leaving open the possibility for the Federal Reserve to achieve a soft landing for the economy as it continues its battle with inflation. The latest release on GDP has a bit for everyone. First, it definitely rules out that 2023 would be the start of the most-anticipated recession. But it also represents a modest slowdown and coincides with other more mixed signals on economic activity. So, as we close out the first month of 2024, there is a lot of interest in projecting where the economy is headed.
Looking under the hood with the BBKI
The latest release of the Brave-Butters-Kelley Indexes (BBKI) has the coincident indicator at -0.3 for December, holding steady from our revised estimate for November of -0.3. This reading suggests the economy hovered the last two months of 2023 just below trend, which our model estimates to be near 2.8%. This read in part reflects the modest uptick in payroll employment growth, a steady unemployment rate, and a modest decrease in housing starts in December.
Thus far, the BBKI suggests that while the economy has been resilient in the last quarter of 2023, some weakness is present. Casting this latest read against the backdrop of the recent progress on inflation and the possibility that the Federal Reserve is done raising interest rates, the medium-term outlook has reasons to be optimistic.
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What is the BBKI?
Business cycle indexes and monthly GDP growth
Because the most comprehensive measures of economic activity, such as gross domestic product (GDP), have a substantial time lag before they are published, policymakers and businessses require more timely and accurate assessments of overall economic activity in order to make better decisions. This led a group of economists from the Federal Reserve Bank of Chicago and the IU Kelley School of Business to create a set of indexes — the BBKI — that can accurately identify key turning points in economic activity earlier.
The BBKI inputs an unbalanced panel of 490 monthly measures of real economic activity plus quarterly real GDP growth extending back to January 1960. (These data broadly reflect the set of real economic activity indicators commonly used to forecast U.S. GDP growth.) The outputs include a coincident index, a leading index, and not only a measure of monthly GDP growth, but also a decomposition of it into its trend, cycle and irregular components.
The coincident index
The coincident index addresses the question: "Where are we?"
It is measured in standard deviation units and assesses the current strength of the economy. Using a threshold value of -1.0, provides a remarkably accurate (up to 99% accurate) way to gauge whether the economy is in a recession. This accuracy in gauging the strength of the economy has been shown to best many of the leading alternatives and can often come in a much timelier fashion given that the BBKI is released monthly.
The leading index
The leading index addresses the question: Where are we going?
It is a sub-component of the coincident index that isolates the economic activity that has historically been a leading signal of the trajectory of economic activity going forward. This leading index has on several occasions projected a future business cycle turning point several months before a peak or trough actually occurs — historically being the most informative about six to seven months out.
Monthly GDP growth
Each month, real GDP growth is allowed to have three separate components — each with their own separate type of dynamics — that all must add up to yield the total amount of growth or contraction.
Trend: This represents the very low-frequency and slow-moving component of real GDP growth. One can interpret it as the very long-run average of real GDP growth. While the trend component does not vary that much month to month, over the last several decades we have seen a noticeable decline in the long-run average of real GDP growth.
Cycle: This is the component of real GDP growth that reflects the business cycle. It is designed to capture systematic expansions or contractions across a variety of sectors of the economy. It is the cycle component that in many instances will be the most influential in guiding assessments about the health of the economy and public policy decisions designed to address it.
- Irregular: This component is what remains “left over,” after accounting for the trend and cycle components, to get back to the amount of growth or contraction we observed. While the BBKI methodology is designed to have the trend and cycle components reflect movements that are likely to govern the direction of growth going forward, the irregular component is designed to reflect more “one-off” or random fluctuations that are less likely to reflect where economic activity is headed in the future.
The BBKI approach identifies each of these components by breaking down the quarterly time series of real GDP and how it relates to the large set of other economic activity indicators. By leveraging the monthly indicators, it is able to construct these measures (and the aggregate) at a monthly frequency. This means the BBKI is able to provide a more detailed estimate more frequently than is reported by the U.S. Bureau of Economic Analysis.
Read more about the BBKI
The table below shows upcoming releases along with the data used in each release.
|Date of Release
|March 4, 2024
| January 2024
|April 1, 2024
| February 2024
|April 29, 2024
| March 2024
|June 3, 2024
| April 2024
|July 1, 2024
| May 2024
|July 29, 2024
| June 2024
|September 3, 2024
| July 2024
|September 30, 2024
| August 2024
|November 4, 2024
| September 2024
|December 2, 2024
| October 2024
|December 23, 2024
| November 2024