Philly Fed’s ADS Business Cycle Index Near A Recession Signal

Is the US economy at risk of a double-dip recession? The threat is rising, according to the latest update of the ADS Index, a real-time tracker of business conditions published by the Philadelphia Fed. This benchmark is a valuable metric for monitoring recession risk, but its attempt to be timely also leaves it vulnerable to noisy volatility. Nonetheless, the latest ADS slide in the current climate bears watching as the pandemic continues to roil America in the new year.

Last week’s weak payrolls data and the ongoing surge in weekly jobless claims took a hefty bite out of the ADS Index, which is updated whenever new data is published for any of its six components. Last week’s labor market numbers were brutal overall and ADS fell to just slightly above a level that marks recession conditions – the weakest reading for ADS since the economy began recovering in the summer from the initial coronavirus shock in the spring.

ADS tumbled sharply after last week’s economic updates, dropping to -0.73, which reflects data through Jan. 2. The index is currently just above the -0.80 mark that a San Francisco Fed paper identified as a level signaling recession conditions (red line in chart below).

Weighing on the latest downdraft in the ADS data is last week’s news that US payrolls declined in December for the first time in eight months. Meanwhile, new weekly filings for unemployment benefits continue to rise at an alarming rate. Claims increased 787,000 for the week through Jan. 2, which reflects a month-long run of advances that exceed the peaks in previous recessions.

The double-barreled release of dark labor market data cut the ADS index sharply. Is this a sign that a new phase of economic contraction is now baked in for the first quarter and perhaps beyond? Maybe not.

The case for optimism (or at least a lesser degree of pessimism) starts by recognizing that the ADS Index is a volatile beast and so it’s prone to false signals. Note, too, that when we run the raw ADS data through a probit model to estimate the implied level of recession risk the results still show a moderate threat, as indicated in the next chart below.

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