These 3 Financial Stress Indexes Provide NO Evidence That a Recession Is Pending

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2. The Chicago Fed National Financial Conditions Index (NFCI) is based on 100 financial indicators consisting of 47 weekly, 29 monthly, and 24 quarterly variables, and has proven to be a highly predictive and robust indicator of financial stress at leading horizons of up to one year. Empirical analysis indicates that the NFCI is 95 percent accurate in identifying historical crises contemporaneously. Increasing risk, tighter credit conditions and declining leverage are consistent with tightening financial conditions are associated with positive values for the NFCI, while negative values indicate the opposite. The NFCI has been negative for the last three years, and has been trending downward for the last year (see red line in top chart). At -0.71 for the first week of November, the NFCI is well below its historic average of -0.40.

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3. The Kansas City Fed Financial Stress Index (KCFSI) is a monthly composite index of 11 financial variables (yield spreads and asset prices) and the KCFSI is calculated using the principal components analysis. According to Thursday’s press release, the Kansas City Financial Stress Index for the month of October continues to indicate that financial stress in the U.S. financial system remains low. The October KCFSI was -0.40 in October, a slight increase from September’s index, but below its long-run average of zero. For the last nine months starting in February, the KCFSI has been negative (lower values indicate less financial stress), and the general trend over the last year has been downward.

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Bottom Line

Based on statistical measures of financial market stress from three district Federal Reserve banks, financial stress in the U.S. financial system remains low through the end of October (for the monthly KCFSI) and into the first week of November (for the weekly indexes).

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Past recessionary periods have been associated with rising index values for all three financial stress indicators, and we’re now seeing the opposite – all three indexes have been trending downward for the last year. Taken together, these three stress measures provide no evidence that the U.S. economy is in recession now, and no evidence that a recession is pending.

*http://www.aei-ideas.org/2012/11/financial-stress-in-us-financial-markets-remains-low-by-three-statistical-measures-and-has-been-trending-downward/

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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