The Traphagen Recession Index (TRI) is a proprietary economic index developed by Traphagen as a tool to help predict US GDP growth rates and possible recessions. The TRI incorporates several different factors that have had a history of predicting recessionary periods months ahead of the official recession start. Some of the factors we actively monitor and are incorporated into the index include US corporate profit margins, Treasury yield spreads/trends, non-farm payroll trends, two different Leading Economic Indicators (LEI).
The TRI can range from 0 to 100 (although for the vast majority of the time should be in the 10 to 70 range). The index levels should be interpreted as ‘the percentage of a recession within the next 12 months’. Therefore, if the current index level is ‘35’, that means there is approximately a 35% chance of a US recession over the next year. The ‘average’ chance of a recession over any 1 year period is about 15%.
Traphagen developed the index for two main reasons. First, we wanted a reliable, diversified, and useful tool that would assist us in predicting recessions and economic growth rates over the intermediate term. This index is one of many tools we use to help position our client portfolios. Secondly, we wanted to give our clients an easy and accessible way to view our opinion on the US economy over time.
CURRENT TRI INDEX
After reaching an all-time high last month of just under 50%, the ‘TRI’ has decreased this month to 46.8%. Again, this metric can be interpreted as the chance of a recession in the next 12 months. Although this is the first recorded decrease in recent months, we are still around levels where defensive action could be taken. The partial inversion of the interest rate curve is the primary indicator that historically has predicted a recession. The inversion simply means that short term bonds are yielding more than longer term bonds.
During this same time period, Fed Chair Jerome Powell has come out with even more dovish statements, which leave investors assuming that a rate cut is likely in the near future; in fact this should happen in the last week of July. As a result, the stock and bond markets have built in rate cuts into their price levels. Another metric that is flashing a more cautionary indicator is the S&P 500 Profit Margin while the AIER Leading Economic Indicator is now neutral.
Again, if we see a significant further move from these elevated levels (roughly above 50%), some additional defensive action could be taken, especially within more conservative portfolios. If you have any questions about the TRI please contact your Traphagen Wealth Advisor.
|10 Year vs. 2 Year Treasury Note Spread|
|% CHANCE OF REC. BASED ON ABOVE METRIC||65%|
|US Treasury Curve Shape & Recent Trend|
|% CHANCE OF REC. BASED ON ABOVE METRIC||25%|
|Conference Board ‘Leading Economic Indicator’|
|% CHANCE OF REC. BASED ON ABOVE METRIC||35%|
|AIER Leading Economic Indicator|
|% CHANCE OF REC. BASED ON ABOVE METRIC||45%|
|Stock Market Action/Breadth|
|% CHANCE OF REC. BASED ON ABOVE METRIC||15%|
|SP500 Profit Margin & Trend|
|% CHANCE OF REC. BASED ON ABOVE METRIC||80%|
|Nonfarm Payroll (YoY%)|
|% CHANCE OF REC. BASED ON ABOVE METRIC||35%|
Q: What is the Traphagen Recession Index (TRI)?
A: Traphagen has incorporated 6-7 different factors that have had a great history of predicting past recessionS while at the same time limiting the amount of ‘false positives’ (or predicting recessions that never happened). We then weight all these factors differently and aggregate all signals into the overall TRI reading.
Q: When did Traphagen develop this index?
A: Traphagen began research on the index and many different factors in late 2015 and developed the first iteration of the TRI in January of 2016. Overall we expect the TRI to remain largely unchanged through time, but if certain factors lose their predictive ability or others seem more important we can add and/or subtract pieces of the index.
Q: How does the TRI affect Traphagen’s portfolios?
A: If the TRI is very low (lower than 15) or very high (over 60 or so) we would likely take some action. If the chance of a recession is below average, and therefore very low, we would likely position the portfolio in a more aggressive manor with more stock holdings. When the TRI is high (above 50-60) we would put more defenses in the portfolio and reduce stocks and likely increase alternative/bond holdings.
Q: How often is the index updated?
A: Traphagen updates all factors and calculates the new TRI index level once per month.
Q: I am a writer, author, reporter, or other interested party, can I use or quote your index level in my work?
A: You may, all we ask is that you cite the index with the source and Traphagen.