The outlook for business activity did not deteriorate this month as much as might have been expected, given the drumbeat of negative news since our last report. Our latest batch of data does not offer much hope for optimists, but does not provide much fodder for gloom-and-doom pessimists either.

Despite changes in the appraisals of three leading inidcators of economic activity, the percentage of leaders we have appraised as expanding remains unchanged. Thirty-three percent are expanding (three out of the nine for which a trend is evident), the same as last month. This index, as it stands below 50 percent, continues to signal that a recession is likely.

AIER's Percentage of Leading Indicators Expanding: 33 Percent

However, our cyclical score, which is based on a separate, purely mathematical analysis of the leaders, increased to 50 from a revised score of 44. A score below 50 suggests a recession is likely; a score of 50 suggests that continued expansion is statistically as likely as recession. Unlike the percentage of leaders expanding, the score is subject to revision, and this month's score could be revised in either direction. More notable is the rising trend in the score since November. As can be seen in the accompanying chart, similar increases in the past usually occurred only when the economy was emerging from recession, or from a period of slow growth that did not even qualify as recession (1967, 1995). But here again, the plotted data reflect all historical revisions; the score that was initially reported in “real time” sometimes painted a different picture. In short, it is premature to conclude that the cyclical score is now signaling expansion.

AIER's Cyclical Score of Leading Indicators: 50 Percent

After hovering well above 90 for all of 2006 and half of 2007, our six coincident indicators of economic activity are beginning to show signs of deterioration. The roughly coincident series reflect the recent trend of business activity, and are beginning to confirm the trends of economic stagnation signaled by our leading indicators since last spring. And while the chart below shows that the cyclical score of the coinciders has never fallen to this level outside of a recession (since 1965), the score has yet to fall below 50 (and thereby confirm the recession signal given by the leaders). However, it is not unusual for this score to remain high through the first few months of a business contraction and then drop sharply.

AIER's Cyclical Score of Coincident Indicators: 72 Percent

For a more in-depth analysis, please see the latest issue of Research Reports.