Each month I calculate the strength of the US economy using a math based model I call RPA (Recession Probability Analytics). When the number rises above 50 it means the US economy is in the bottom 50% of all economic conditions relative to it history. While far from perfect, the model has had an uncanny ability to correlate (negatively) with stock market returns. In other words, when the model moves above 50 the S&P 500 has fallen over 25% and when it is below 50 the S&P 500 has risen nearly 20%. I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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RPA rose slightly in April, the first time in 5 months. The risk of recession though only went up to 37.25 though, well below the 50 threshold that gets me worried.
The softening in the economy largely was due to the job market. With unemployment still above 8% and not strengthening to pre-2008 levels is mildly concerning at this point but not a major threat. One bi-product of companies holding off on hiring to former levels is company profits, which are still growing as companies are leaner and operating much more efficiently today. Consumer confidence is also quite strong and that typically translates into continued spending - a huge part of the US economy accounting for roughly 70% of GDP (gross domestic product).
There are always risks the economy could falter, that Europe's fiscal crisis could re-emerge, and that without job growth the consumer spending could seize up; but for now though the positives are outweighing the negatives and it is a good time to be an investor.
If you have any questions or comments about RPA - feel free to use the comment feature on my blog. If you're getting this notice via email you can of course just hit the reply button and your email will come to me directly.
Thanks and have a great week,