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 27%. 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) dropped to 45 last month but has risen to nearly 48 this month. It's an odd time for the US Economy as we've consistently been hovering around my "danger zone" of 50. Today Consumer Confidence was released and registered its highest level since 2008. Online holiday sales were also released and are up 30% since last year. So there are signs people are confident and spending, which in turn helps the economy. On the flip side, real unemployment is still very high and these same consumers that are confident and buying - don't really have the money to do so (the average American has less than $5,000 in savings yet average personal debt of over $50,000).
To me this just proves that something will eventually have to give. Spending money people don't have is not sustainable for obvious reasons. Same goes for Government, which is running out of time to deal with the "fiscal cliff" set for the end of this year (more on this in a future post).
Putting all this data in perspective is tough. We know the economy is not great, nor terrible. It's fragile though and it wouldn't take much to send the US back into another recession. For now, however, we are not in a recession (technically speaking) and financial markets have been mostly resilient for the year. While I always advocate for more conservative, balanced investing approaches - with RPA hovering around 50, now is a reasonable time to be a touch more conservative than normal.