The Independent Market Observer

Economic Risk Factor Update

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jun 2, 2014 3:16:00 PM

and tagged Economic Risk Factor Updates

Leave a comment

Today, I’m launching a new series of monthly updates on risk factors that could signal economic trouble ahead. (The data comes in on a regular basis, but its economic significance doesn’t change that quickly.)

The data series highlighted here have proven to be reliable storm signals—and they’re suggesting a pretty nice summer ahead. 

The Service Sector

Signal: Green light

Looking at the chart below, you can see that surveys of the service sector fell to and below 50 in the past two recessions. Despite a first-quarter drop-off, we remain well above problem levels. 

Risk Factor   

Private Employment: Annual Change

Signal: Green light

Changes in private employment are critical to economic growth. As you can see below, growth dropped to and below zero before the start of the past five recessions. We’re now at levels consistent with the peak of the mid-2000s and the mid-1990s. No problems here.

Risk Factor  

Private Employment: Monthly Change

SIgnal: Green light

Here are the same numbers on a monthly basis—again, looking good.

Risk Factor  

Yield Curve (10-Year Minus 3-Month Treasury Rates)

Signal: Green light

As the old saying goes, economic expansions don’t die of old age, they’re killed by the Fed. One way of seeing whether the Federal Reserve has its hatchet out is to look at the difference between long- and short-term interest rates. You can see that they dipped to or below zero in the past five recessions, but are around 3 now. No problem here. 

Risk Factor  

Consumer Confidence: Annual Change

Signal: Green light

Confident consumers buy things and generate economic growth. As the chart below shows, a drop in consumer confidence of around 20 percent has led the past five recessions. Consumer confidence is growing right now and remains well above the trouble zone.

Risk Factor  

Economic Forecast: Break Out the Sunscreen

Based on the current signs, the economy looks poised for continued growth. None of the usual risk factors is indicating a slowdown; in fact, most are in line with the healthy levels of the mid-2000s.

I’ll update this forecast next month, but for now, it looks like we can expect a nice summer on the economic front.


Reminder: As you may have noticed, we're live at my new URL, If you subscribed previously, you'll need to re-subscribe at this location. (I apologize for the inconvenience.) And if you're new to this blog, I hope you'll subscribe and keep coming back!

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®