The Independent Market Observer

Economic Risk Factor Update: April 2016

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Apr 5, 2016 4:34:12 PM

and tagged Economic Risk Factor Updates

Leave a comment

Once again, it’s time for our monthly update on risk factors that have proven to be good indicators of economic trouble ahead. On the whole, some of the worrying downward movement has reversed, suggesting that risks may be starting to retreat. The change in consumer confidence metric remains below zero, but even that may be stabilizing. We’re also seeing some signs of stabilization in other areas, such as the yield curve indicator.

Although risks remain, many of these metrics continue to improve on a forward-looking basis, and the overall view remains positive—more so than it has for the past couple of months.

The Service Sector


Signal: Green light

This metric bounced back more than expected last month, supporting the idea that the service sector is regaining its footing after being pulled down by weakness in manufacturing. Although the indicator is below levels of the past year or so, it remains healthy, and we can expect more business and employment expansion. Continued strength in the service sector is consistent with business confidence; as a representative sample of the largest sector of business, this is an important leading indicator.

Private Employment: Annual Change


Signal: Green light

Private employment growth year-on-year increased slightly, with reasonably strong numbers in the February and March reports, and remains at healthy levels (at or above those of the mid-2000s), suggesting that the decline in the growth rate may be stabilizing and potentially reversing. Because this is an annual figure, the changes are slower and smaller than those we see in more frequently reported data, but the trend continues to be positive.

Private Employment: Monthly Change


Signal: Green light

These are the same numbers as in the previous chart, but on a month-to-month basis, which can provide a better short-term signal. Though below the February number, March’s job creation was robust, indicating that employment growth continues at a steady pace and alleviating some of the concern for this indicator. Total employment growth remains healthy, within the range for this recovery.

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


Signal: Green light

Rates for the 10-year Treasury remained relatively stable over the past month, while 3-month rates dropped, and the spread between long-term and short-term rates widened accordingly. Although the spread remains at healthy levels, as with other metrics, the trend over the past couple of months has changed from positive to negative, and it has now extended long enough to suggest this may be a fundamental negative shift. This month’s recovery is a positive sign, but we'll need to keep an eye on this indicator.

Consumer Confidence: Annual Change


Signal: Yellow light

Consumer confidence increased this month, but due to base effects, the year-on-year growth rate declined slightly below last month’s disappointing figure. Although we track consumer confidence on a year-to-year basis, the moderation of the decline, as well as the actual increase on the month, suggests this trend may be stabilizing. The year-on-year growth rate remains well above problematic levels, and the risk is somewhat less than last month suggested. Nonetheless, the current below-zero level (despite recent positive news) suggests this metric isn't out of the woods, and it will remain a yellow light until we see an actual recovery.

Conclusion: Signs of stabilization

With the exception of consumer confidence, all of the major indicators have shown improvement, suggesting that recent downward trends may be moderating and possibly even reversing. If so, the current slowdown may abate.

Although a continued slowdown remains quite possible based on the data, a slowdown is not a recession. And again, the improving data indicates the slowdown may be lifting. One very positive fundamental is the continued strength of employment—the most important of the indicatorsas supported by the bounce back in the ISM Non-Manufacturing Index.

Overall, though risks certainly remain, they appear less threatening and less immediate than they did last month, and current conditions still warrant a green light for the economy as a whole.


  Subscribe to the Independent Market Observer

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.

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®