Recession Probability Update - August 2012
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 15%. I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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RPA (Recession Probability) has risen again this month, the fourth consecutive increase. It has also risen above our threshold of 50, meaning the US Economy is now statistically in the bottom 50% of all relative economic conditions. This could prove to just be a summer slump, much like 2011, or a sign of further deterioration to come.
Key headwinds affecting RPA are:
Major drop in Consumer Confidence
Increase in Initial Jobless Claims (unemployment)
Drop in Chain Store Sales (people are spending less)
When you combine these headwinds, plus a few more, plus uncertainty with Europe's fiscal policy, plus uncertainty with US fiscal policy....well, you get a higher RPA reading.
While I always advocate for more conservative, balanced investing approaches - with RPA moving above 50, now is a time we become a touch more conservative than normal.