Economic Risk Factor Update: November 2018

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 6, 2018 3:55:45 PM

and tagged Economic Risk Factor Updates

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The good news is that confidence remained strong last month. Business sentiment bounced back in September to a 21-year high and, despite a small pullback, remains very close to that level. Consumer confidence rose even further, to an 18-year high. Even better, job growth rebounded significantly after a weak month. Overall, the economic news remains solid, which should support continued growth.

Although there are some signs of slowing trends, notably in housing, the continued strength of these key indicators suggests that the recovery continues and that positive trends remain in place. But the question of whether the tariffs are finally starting to have an effect remains open. The current data indicates that, if so, the effect is minor.

The Service Sector

economic risk factor

Signal: Green light

In July, a drop in business confidence took it to the lowest level of the year. But we saw a recovery in August and a further leap in September, which took us to a 21-year high. Although October’s data showed a small pullback, we remain close to the highest levels of the past couple of decades. This is a diffusion index, where values above 50 indicate expansion. So, the significant bounce back and very high level suggest that growth is likely to continue for the rest of 2018. This rise also takes the indicator above its long-term trend line (as you can see in the chart above), suggesting that business confidence may even improve further. This indicator stays at a green light, as it remains very expansionary.

Private Employment: Annual Change

economic risk factor

Signal: Green light

October job growth came in at 250,000, well above expectations and a significant bounce back from September's weak results. Keep in mind, however, that both September and October numbers were affected by Hurricane Florence. The continuation of growth in the year-on-year trend, as shown in the chart above, suggests that job growth remains strong and is likely to stay at a healthy level for the foreseeable future. As such, this indicator remains a green light.

Private Employment: Monthly Change

economic risk factor

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, September was a weak month, largely due to Hurricane Florence. The subsequent significant bounce in October shows that job growth continues despite that temporary pullback. As with the other signals, and given the continued healthy long-term trends, this indicator remains a green light.

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

economic risk factor

Signal: Green light

The spread between the 10-year and 3-month rates ticked up last month on surprising increases for 10-year rates. Rising rates can be a sign of trouble. In this case, however, the increase reflects continued growth and is a healthy indicator. As it takes the spread higher, this indicator moves further away from risk levels. So, we are leaving this indicator at a green light.

Consumer Confidence: Annual Change

economic risk factor

Signal: Green light

Consumer confidence rose even further in October, from a downwardly revised 135.3 to 137.9. This rise brought it to the highest level since September 2000. On an annual basis, this increase was enough to keep the annual rate of change positive, continuing a trend seen this year. With confidence very high on an absolute basis and with the annual change both positive and well outside the trouble zone, there are no signs of risk here. We will leave this indicator at a green light.

Conclusion: Economy growing, positive trends may accelerate

All four indicators remained positive on an absolute basis, and the data continues to be strong. Recent improvements after a period of relative weakness suggest that present conditions remain favorable overall and even seem to be improving.

The economy gets a green light for November.

economic risk factors

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