I made a number of significant improvements to the recession model in January of 2020. If you missed the January recession model post, or if you would like to review the improvements to the models, please revisit the Recession Model Forecast: 01-01-2020. In the following months, I reduced the number of input variables in all of the peak-trough neural network models and expanded the number of individual models. I also further constrained the models, which made them even more robust - especially when interpreted as a single aggregate peak-trough forecast. Finally, due to the very large discrete changes in the economic data due to COVID-19, I capped the maximum standardized deviation above the recession threshold, which is particularly important when reporting the mean standardized deviation. No changes were made to any of the explanatory variables.
I also recently developed a SEIR model for COVID-19, with variables for the magnitude and timing of social distancing restrictions, as well a probabilistic variable for decaying immunity. The results were ominous and are not fully reflected in equity prices, especially after the very large rebound from the March 23rd lows in the last few months. I explained the Coronavirus model in an in-depth article titled: "New Coronavirus Model and the Economy," which I posted on April 1, 2020.
This article updates the diffusion indices, recession slack index, aggregate recession model, and aggregate peak-trough model through August 2020. The explanatory variables are now capturing the effects of COVID-19 on the market and on the U.S. economy. Continue reading