The Independent Market Observer

Economic Risk Factor Update: April 2018

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Apr 10, 2018 1:13:14 PM

and tagged Economic Risk Factor Updates

Leave a comment

March’s data continued to be good overall, although there was some pullback from February’s very strong reports. Job growth slowed substantially, which was the most notable concern. This is most likely not an immediate problem, however, as long-term trends remain favorable. More worrying is that while confidence remains high, the trend appears to be peaking for both consumers and business. Again, this is more of a change in trend rather than an immediate concern. Fed policy continues to be stimulative, which is helpful, despite the recent rate increase. Overall, this month’s economic data indicates that growth continues, although it may have peaked.

The Service Sector

economic risk

Signal: Green light

Business confidence remained at high levels, although the Institute for Supply Management (ISM) Nonmanufacturing index dropped slightly. The drop—to 58.8 for March from 59.5 for February—was slightly below expectations but still leaves the index close to the post-recession high of four months ago. This is a diffusion index, where values above 50 indicate expansion. This continued strength suggests that growth is likely to continue in 2018, but the recent pullback indicates that growth might have peaked. Going forward, these levels of confidence should keep driving economic growth, leaving this indicator at a green light.

Private Employment: Annual Change

economic risk

Signal: Green light

March job growth came in at 103,000. This result is well below the February figure of 326,000—a substantial slowdown. While the weak month is concerning, the fact remains that the long-term trend remains positive, with 2018 growth above that of 2017. Given the volatility of this data, this is likely just normal variation rather than something worse. The annual figure continued to show improvement, so this indicator remains a green light.

Private Employment: Monthly Change

economic risk

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.

As noted above, March was a weak month. But given the very strong start to the year, some pullback is not a concern at this point. Overall, job growth continues to be high enough to keep up with population growth, while the rise in the employment-to-population ratio suggests that people are moving back into the labor force. As with the other signals, and given the continued positive long-term trends, this indicator remains a green light.

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

economic risk

Signal: Green light

The spread between the 10-year and 3-month rates dropped a bit last month, as the Fed raised rates by 25 basis points (as expected) and longer-term rates ticked down in the face of rising risk perceptions around Washington’s proposed tariffs. While this takes us closer to the trouble zone, we are still outside the immediate risk levels, so are leaving this indicator at a green light. Future rate hikes by the Fed might narrow the spread further, which will be a key area of concern as we move further into 2018 and will need to be watched. For the moment, however, the concern is not immediate.

Consumer Confidence: Annual Change

economic risk

Signal: Green light

Consumer confidence dropped slightly in March, but only from February’s peak, which was the highest level since 2000. The small decline, coupled with substantial improvements a year ago, took the annual change close to zero for the first time in more than a year. While this indicator remains well outside the trouble zone, the sustained decline throughout 2017 suggests confidence growth has indeed rolled over, so we will need to keep an eye on it. That being said, consumer confidence remains at a very high level, and the annual change is still well outside the trouble zone, so we are leaving it at a green light.

Conclusion: Economy growing, positive trends may be peaking

All four indicators remained positive on an absolute basis, but pullbacks in several indicators suggest that the recovery may have peaked as we move into a slower growth phase. Conditions remain favorable overall, however, and the economy gets a green light for April.

economic risk factor

Subscribe via Email

New call-to-action
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®