The Capital Spectator will be migrating to a new blogging platform (WordPress) over the next day or so, which means that all the usual caveats are lurking with regards to glitches and strange things that go bump in the digital night. This seems like a good time to take a short break from the usual routine as I do battle with the tech gods and Old Man Winter. It’s back to the numbers on Monday, January 27.

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly to +0.22 in tomorrow’s update for December, according to The Capital Spectator’s median econometric forecast. In the previous release for November, the three-month average was +0.25. Values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate, CFNAI’s three-month average is projected to remain at a level that’s historically associated with economic expansion–at a rate that’s slightly above trend (as indicated by a positive value).
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Forecasting has a battered reputation in finance and economics, and for all the obvious reasons. But that doesn’t change the simple fact that you just can’t avoid prediction when it comes to macro and markets. Thinking otherwise is delusional. Investing is inherently an act of forecasting. The only reason to buy (or sell) an asset: the presumption that the price will rise (fall) at some point in the future. That leaves us to ponder why prices might rise or fall. A reasonable place to start: the business cycle. In any case, you’ll need a model of one form or another to develop some intuition for another question: Will prices rise or fall (or will the state of macro change)? There are lots of models to choose from, but the challenge is interpreting the raw data. That’s where a probit regression (or its close cousin: logit regression) can help.
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