Economic Risk Factor Update: July 2014

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jul 3, 2014 10:10:00 AM

and tagged Economic Risk Factor Updates

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In this monthly series, I look at risk factors that have proven to be good indicators of economic trouble ahead.

Although one potential problem area has emerged since last month’s update, most indicators continue to show improvement, and the overall economic forecast remains good. Headed into the July Fourth weekend, it looks like we’re cleared for more sunny weather!

The Service Sector

 risk factor

Signal: Green light

Expectations for the service sector continue to tick up, remaining well above 50 (the number that predicts trouble). In fact, after a weak first quarter, we’re now approaching the highest levels since the crisis and are above the levels of most of 2007. 

Private Employment: Annual Change

 risk factor

Signal: Green light

Private employment continues to grow at a pace close to that of the mid-2000s. Interestingly, even during the weak first quarter, job growth moved along at the same clip—a positive sign. 

Private Employment: Monthly Change

 risk factor

Signal: Green light

These are the same numbers as shown in the previous chart, but on a month-to-month basis, which can provide a better short-term signal. We do see a drop-off in the first quarter, but it was short-lived. Gains continue around the average of the mid-2000s, but with less volatility, suggesting a steady and sustained recovery. 

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

 risk factor

Signal: Green light

Rates ticked down over the past month, but the spread remains at healthy levels. Taper notwithstanding, the Fed is still pushing money into the system, and the difference in interest rates continues to support the economy. 

Consumer Confidence: Annual Change

 risk factor

Signal: Green-ish light

This is the item that makes me go hmmm.

The trend over the past four months has been down, which isn’t necessarily a problem, but it's not a positive sign either. To the extent that it reflects consumer confidence normalizing (which seems to be the case), it’s a good sign, but there are other possibilities as well. I’m calling this a green light, but it does have a yellowish tinge this month. 

Economic Forecast: Full Speed Ahead

Right now, the signs look quite good for continued growth. None of the usual indicators of a slowdown is even close to the trouble zone. Although consumer confidence is moderating somewhat—which is also reflected in slower consumer spending growth—this is more of a small cloud on the horizon than a pending storm.

risk factor

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