Economic Risk Factor Update

Posted by Brad McMillan, CFA, CAIA, MAI

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

and tagged Economic Risk Factor Updates

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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.

risk_factor

Reminder: As you may have noticed, we're live at my new URL, http://blog.commonwealth.com/independent-market-observer. 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!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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