|Q: How is the BaR Analysis Grid© useful?|
|A: The most useful aspect of the BaR is the time it saves you. Quick glances of the BaR grid and Percent MoC from Baseline table on the homepage tell you more about economic conditions than hours of reading narrowly-focused, often contradictory, articles and analysis. It also helps you understand the accuracy of other sources you are following.
The BaR provides an easy to understand representation of overall economic conditions and the sentiment of economic stakeholders: consumers, small business, credit managers, and purchasers. It not only tracks key economic indicators, but it also shows where the majority of indicators will be when a recession is looming. When most economic indicators move into the decline quadrant and toward, or below, the baseline, this signals that the economy is approaching a recession.
In addition, the BaR provides unprecedented insights into how business cycles unfold. For example, the BaR shows that the business cycle is composed of multiple mini-cycles. Too often, economic "experts" give dire warnings that the downside of each mini-cycle signals a pending recession. In reality, these are the normal ups and downs of a business cycle. The BaR distinguishes between expected, regular mini-cycles and the last fatal cycle that occurs before a recession.
Lastly, another benefit of the BaR is that by mid-month 16 of its 19 indicators have been updated. This provides an update that is as "real time" as is possible with economic data. Experience shows that the MoC, mean of coordinates, generally shows modest change from mid-month until the end of the month, by which time all 19 indicators have been updated.
|Q: How do I read the BaR?|
|A: Click on the BaR Analysis Grid tab and scroll down to the How to Read the BaR section. Once understood, the BaR is easy to follow and understand.
|Q: What is the mean of coordinates (MoC)?|
|A: The most important point on the BaR is the MoC, the mean of coordinates, which is the average of all plotted points. It shows the overall condition of the economy and the outlook of economic stakeholders. After a recession, the MoC will largely stay in the recovery quadrant. As the economy strengthens, the MoC will eventually reach the expansion quadrant and begin to move above the baseline, which is an approximate recession threshold. The economy is the strongest when the MoC moves upward and to the right.
However, it is not unusual for the MoC to move into the decline quadrant even when it has an overall positive trend. This may happen briefly when the economy is expanding but the rate of growth slows, which is not uncommon during a business cycle.
Importantly, when the MoC stays mostly in the decline quadrant and moves towards the baseline, this indicates the economy may be moving towards a recession.
|Q. Why do some indicators regularly swing between the expansion and decline quadrants?
|A. The graphic below illustrates how economic indicators with a positive trend line can vacillate between positive (green arrows) and negative (red arrows) rates of change. As all indicators have a tendency to hit new highs, and then stall or decrease slightly, an indicator with a positive trend will predominately stay in the expansion quadrant, but will periodically shift into the decline quadrant.|
|Q: Shouldn’t the economic indicators used on the BaR be weighted? Aren’t some indicators more important than others?|
|A: Each economic indicator used on the BaR has a “natural” weight in the real economy. For example, corporate profits are likely to have a significant influence upon other indicators. If a more influential indicator declines, its decline and its effect on other indicators will be captured on the BaR.
In addition, analysis of historical BaR grids shows that the indicators that decline first prior to one recession may not do so before another recession. If heavily weighted indicators were slow to decline prior to a recession, this would defeat the purpose of the BaR.
Finally, every indicator plotted on the BaR is by itself a useful indicator. But, no one indicator (or a few indicators) is superior to the sum of all indicators, which is shown by the mean of coordinates (MoC).
|Q: Wouldn’t it be better to plot the BaR with fewer economic indicators?|
|A: The strength of the BaR is that it uses an array of indicators that represent all aspects of the economy, providing an accurate portrayal of recent economic activity and sentiment. All 19 indicators correlate well with the business cycle and have a history of declining prior to recessions. When the majority of the indicators move in one direction, it is a sure sign of changing economic conditions.
|Q: Often economic data is revised a month or two after it is released. Doesn't this affect how the BaR Analysis Grid reads from month to month?|
|A: Only six of the 19 economic indicators that are plotted on the BaR are subject to major revisions. Generally, not more than one or two see significant revisions during the same month. The key measure of the BaR is the MoC, which is the average of all plotted indicators. Even if several measures are revised in the following month, because the MoC is an average of all 19 indicators, its statistical change is generally not very significant.|
|Q: What are the leading indicators that are tracked on the BaR and why are they tracked?|
|A: There are eight leading indicators tracked on the BaR: consumer sentiment, private building permits, small business optimism, nonfarm job openings, temporary employment, unemployment claims, St. Louis Fed Financial Stress Index, and yield curve spread (10-yr minus 3-month). The leading indicators provide an early signal of which way the economy is trending. The leading indicators should near the baseline before the MoC, providing the earliest indication that a recession is approaching.|