Forecasting Recessions: the Anxious Index

An example includes the 1987 stock market crash where the index was seen to be above 30 following it and did not precede into another recession. Studies by the Philadelphia Fed also suggest that the accuracy of the index diminishes significantly after one quarter when a survey is taken. This happens for two reasons:

(1) inputs to the forecast are based on flawed assumptions since professional forecasters use yield curves in their forecasts and

(2) the survey, which began in 1968, does not include forecasts during the Great Depression, which are more relevant to the current economy.

In spite of this, the anxious index is a more accurate and reliable warning for recessions than individual economists’ forecasts, which are deemed by most industry professionals to be poor estimators of future economic activity. The index has been accurate in forecasting recessions one quarter ahead and historically, a number of 40 and above has been a good indication that a recession has already started. The most recent case was in the first quarter of 2008 when the index was 42.9.

During the first quarter of 2009, the anxious index was at its peak of 74. Since then, there has been a downward trend in the index from 46.5 in the second quarter to 23.7 in the third quarter. So, at present, the number is around 24. Based on the figures, can we conclude whether the recession is over? Probably not! However, what can be said is that we are still facing a severe recession. How long will the economy take to recover? Only time can tell.

ARB Team

Arbitrage Magazine

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