Carpe Diem

Kansas City Financial Stress Index is back to its pre-recession mid-2007 level

kcfedThe Kansas City Fed Financial Stress Index (KCFSI) is monthly composite index measure of financial stress in the US economy (see details here). Updated monthly by the Federal Reserve Bank of Kansas City, the KCFSI is based on 11 financial market variables (seven money/bond market yield spreads and four measures of asset price behavior), each of which captures one or more key features of financial stress. Over the last 20 years, the KCFSI has accurately identified episodes of financial stress and has also correctly anticipated changes in overall economic activity. The KCFSI is constructed to have a mean value of zero and a standard deviation of one. Positive (negative) index values indicate that financial stress is above (below) the long-run average of zero.

According to yesterday’s press release, the Kansas City Financial Stress Index (KCFSI) for the month of February continues to indicate that financial stress in the U.S. financial system remains low. The KCFSI fell to -0.61 in February, the lowest reading since June 2007, well before the Great Recession and financial crisis (see chart above). For the last thirteen months starting in February 2012, the KCFSI has been below zero, indicating that financial stress in the US economy has been below average for the last year.

According to this historically accurate measure of stress in the US financial system (money market, bond market, stock market and the banking industry), financial stress remains subdued and below its historical average. The downward trend in the KCFSI since 2009, and the thirteen recent months below zero suggest that the US economy and financial markets have gradually recovered from the Great Recession and financial crisis, and financial stress has returned to its pre-recession and pre-crisis level that prevailed in the 2004-2007 period.

 

3 thoughts on “Kansas City Financial Stress Index is back to its pre-recession mid-2007 level

  1. I don’t see how this index is worth anything at all. It spiked in late 2008, around the same time that the stock market collapsed and Lehman and everyone else was going under. We didn’t need another artificial index at that point, we could see the market coming undone. It recently spiked up a bit in late 2011 to the same level as late 2007, but then nothing happened… false alarm. This is like saying the news media “anticipated” the World Trade Center going down simply by reporting the ongoing terrorist attacks: all they did is tell us exactly what was happening as it happened, like this index. To the extent you believe it presaged a dip in GDP, again, the stock market collapsing already signaled that. Seems like this index is useless in telling us what will happen next.

  2. I think we have too many economic indexes & indicators for the US economy.It makes things way more confusing than they need to be.We could do very well with just the basic indicators such as inflation/consumption/inventories/housing data & employment.Getting by with a few less political polls would be good for our nations psyche and emotional state also.

  3. Thanks , I’ve just been searching for info approximately this topic for a long time and yours is the greatest I have discovered so far. But, what about the bottom line? Are you positive in regards to the supply?

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