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- March 16, 2020
- Jeff Collins, Ph.D.
The U.S. has experienced the longest period of economic expansion in history. Prior to the global outbreak of the coronavirus, many forecasters were predicting a recession in the future, but that future was likely at some point in 2021. The coronavirus has significantly altered those predictions. The key questions being asked now are: (1) how bad will the slowdown be, and (2) which industries will be most affected?
Today, economists look at several different indicators to try to determine the answers to these questions. Sources for insights include, among others:
- The U.S. Bureau of Labor and Statistics’ unemployment rate
- The Federal Reserve Bank of St. Louis’ Yield Curve
- The U.S. Census Bureau’s new building permits
Additionally, companies rely on the U.S. GDP and other indicators such as the Purchasing Managers Index (PMI) to make forward-looking business and investment planning decisions.
The challenge working with these common economic indicators is that they are either based on data which is too dated to be a robust predictor of future trends, or the indicators rely on subjective sentiment-based polling data, not data based on actual actions taken by people.
Enter the Coupa BSI
Based on the analysis of over $1.5 trillion of spend data from over 1,000 customers and five million suppliers, Coupa has created the first forward-looking economic indicator based on B2B spend behavior, the Business Spend Index (BSI). The BSI is a new index based on actual spend data to measure confidence related to economic growth. Unlike sentiment-based indexes, the Coupa BSI doesn’t rely on what various people at companies say they intend to spend, it is based on what businesses are committing to spend and pay for.
The BSI is a 100% behavior-based index that utilizes the underlying transactional data flowing through the Coupa system, a uniquely large pool of spend data with a common taxonomy that allows for meaningful analysis. As part of Coupa’s initial vision, which started a decade ago, most customers opted-in to anonymously share their data because they understood that the intelligence they would get from the community would benefit them while retaining their privacy and sensitive company information.
The BSI’s ability to predict U.S. GDP
Using the data from $1.5 trillion running through its platform, the Coupa BSI is taking spend data from today to forecast GDP growth three to six months in the future. Modeling something as complex as the U.S. economy is inherently difficult. For example, unexpected events (for example, the coronavirus outbreak) can have immediate and unpredictable impacts on consumer, business, and government spending. Given the challenges, we are encouraged by the strength of the relationship between GDP growth and the BSI.
Correlation between the BSI and GDP
To date, the BSI/GDP correlation coefficient is 0.43. The strength of the relationship is encouraging, particularly given the volatility of trade relationships and recent significant shocks to the U.S. economy (from Boeing’s challenges to the coronavirus and their effects on supply chains). Still, any optimism in the predictive capability of the BSI must be tempered by the relatively short time series of data.
Will the BSI predict the next U.S. recession?
Now, on to the main question being posed in this blog: will the BSI predict the next U.S. recession?
Currently, the U.S. is in the longest economic expansion on record, and, as 2020 began, most economists believed a recession was likely in the next 12 to 18 months. To predict when the next recession will occur, economists use a variety of indicators. Our goal is for the BSI to forecast the next recession with a high degree of accuracy. However, without a recession taking place to calibrate the model, the ability of the BSI to provide an early warning of recession is yet to be seen. What the BSI does provide is a forecast of how the economy is likely to grow in the next three to six months. As disruptions like coronavirus affect organizations, we’ll be closely monitoring how business spending habits change and see what implications they might have for the economy at large.
This is because the predictability of the BSI model depends upon the timeframe of data. More data will make it more reliable. While investors may wish for a never-ending economic expansion, as Coupa’s chief economist, I am waiting for a recession – so the BSI can be calibrated. Stay tuned.
See the latest Business Spend Index report along with more details on its methodology.
Jeff Collins is VP, Business Value Engineering, and Chief Economist, at Coupa Software. He holds a Ph.D. in economics from Haslam College of Business at the University of Tennessee and resides in the San Francisco bay area.