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"Insensibly one begins to twist facts to suit theories, instead of theories to suit facts."        — Sherlock Holmes, A Scandal in Bohemia

Baseline and Rate of Change (BaR) Analysis Grid©

The BaR Analysis Grid© goes well beyond simple trend analysis and adds several important dimensions to economic analysis.
 Most usefully, the BaR takes a jumble of economic indicators and arranges then into an understandable pattern. The BaR:

  • Plots 19 key economic indicators that represent all aspects of the economy and reliably signal the ups and downs of the business cycle. 
  • Uses four quadrants - recovery, expansion, decline, and contraction - to show the current status of the economy.
  • Sets a baseline that is an estimation of where each indicator is likely to be when a recession hits. Charts of the indicators and their baselines are shown here. 
  • Calculates the mean of coordinates (MoC), the average of all plotted points, which shows the general condition of the economy. The MoC is especially useful when comparing grids from different periods of time.
The vertical axis shows whether the indicators are above or below the baseline. The horizontal axis specifies each indicators three-month rate of change, positive or negative. 

BaR Overview r3

How to Read the BaR

Positive economic growth

The BaR demonstrates expanding economic growth when the majority of the plotted economic indicators (blue points) and the MoC (mean of coordinates - red point) are in the expansion quadrant and well above the baseline.
Read Positive Growth

Positive, but slowing economic growth
Economic growth is cyclical. Indicators hits new highs, then stall or decline slightly, then move upward again. This can result in an increasing number of economic indicators moving into the decline quadrant and the MoC shifting leftward. When the MoC and the economic indicators remain above the baseline, the economy is still growing, but at a decreasing rate of growth. 
Read Positive Slowing Growth
For example, a drop in building permits from 1.36 million to 1.30 million would be a decrease in the proportional rate of change. Although growth is still positive (1.30  million permits were issued), the rate of change is negative. The indicator would be plotted in the decline quadrant. All indicators periodically move into the decline quadrant, even as the economy is expanding. A red flag is raised when an increasing number of indicators stay predominately in the decline quadrant and near the baseline. 

Slowing economic growth, pre-peak or post-peak
Even when the economy is growing, due to the cyclical nature of the economy, the MoC and a majority, or near majority, of economic indicators may occasionally move into the decline quadrant. During periods of economic growth, the MoC and most indicators will shift back into the expansion quadrant. However, if the economy has peaked, a grid like the one shown below is a pre-recessionary pattern. As the economy slows, the MoC will mostly stay in the decline quadrant and gradually move towards the baseline.
Read Slowing Growth

Stalling economic growth
When the MoC mostly stays in the decline quadrant and several economic indicators are nearing or have gone below the baseline, this indicates that the economy is stalling. Although the economy can recover briefly, and the MoC may shift to the expansion quadrant, this will be temporary. The economy is still growing, but at a declining rate. 
Read Stalling Growth

Nearing economic recession
After the economy has peaked and the MoC has mostly remained in the decline quadrant, as more and more economic indicators near or go below the baseline, this indicates that the economy is approaching a recession. Here too, the economy is growing, but it has slowed significantly. 
Read Nearing Recession

Economic recession
When the MoC nears or goes below the baseline, this indicates that the economy has begun a recession. The economy is contracting at this point.
Read Recession

Economic recovery
When a recession ends, the MoC and most indicators will move into the recovery quadrant. However, again due to the cyclical nature of the economy, during recovery the MoC can shift into the contraction quadrant occasionally. This is usually temporary, but it does indicate there is some economic vulnerability during a recovery. 
Read Recovery

Rate of Change

A comparison of methodologies has shown that using a three-month trend for the rate of change is the most accurate for portraying economic conditions. The rate of change is calculated as follows.

1. The data for most economic indicators are tracked monthly, using a three-month exponential moving average. The three-month EMA eliminates some statistical noise that is common with most economic measures. Corporate profits, which are reported quarterly, are not adjusted.

2. Using the three-month moving averages, an annualized trend for each indicator is calculated.

3. The trend is adjusted so that all indicators are proportional when they are plotted to the BaR Analsyis Grid©. Proportional adjustments are explained below.

Baselines

Baselines are intended to show where an indicator is likely to be when a recession begins. Each indicator's baseline is determined by it unique characteristics and historical trends prior to recessions. Like the rate of change, the baseline percentages are also proportionally adjusted when plotted, as explained below. Charts of the economic indicators and their baselines can be seen here.


Proportional Adjustments

Based on each indicators unique range of change, all plotted coordinates are set to a base of 100, so that the percent changes for all indicators are of equal weight. This is necessary because the range of percent change for some measures is larger than others, yet their influence on the economy may not be any greater than indicators that have a smaller range of percent change. For example, since 2010, the highest annualized three-month trend for building permits was 90%; whereas, it was only 9% for retail sales. However, the smaller percent change for retail sales is as meaningful to that measure, and to the overall economy, as the larger percent change is for building permits. To equalize both measures, their unique ranges of change are used. Thus a 30% change in building permits, when divided by the 90% high, would equal 33%. In comparison, a 3% change in retail sales, when divided by the 9% high, would also equal 33%. By dividing each indicator's percent change by its unique range, the indicators share a common base of 100 (as 33% = 33 / 100 = portion divided by base). This allows each economic indicator to be proportionally plotted to the BaR Analysis Grid©. (This example simplifies how the adjusted proportional rate of change and baseline percentages are actually calculated, but it demonstrates the essence of the methodology. In the actual algorithm, when an indicator's range is calculated, outliers beyond the three standard deviations from the mean are removed.)

An argument can be made that some indicators, like corporate profits, should be weighed more heavily as their influence on the economy is greater. However, the BaR Analysis Grid© is designed to act in a similar fashion as the overall economy. In the real economy, when corporate profits decline significantly, over time, this pulls down other indicators. Hence, the influence of declining corporate profits works through the economy with some delay. This same pattern would occur on the BaR, making the grid a reasonably accurate representation of the economy. 
Abbreviations and Sources
 

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