Recession Probability Update (RPA) - May 2013
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, since I started publishing RPA the S&P 500 is just about flat (but very volatile), but when RPA has signaled less than 50 (the "green light" so to speak), the S&P 500 has risen over 47% (and not too volatile at all). I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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What RPA is Saying This Month
While April has been modestly down from an investment standpoint, RPA is holding fairly steady. After 3 consecutive months of improving economic conditions though, some areas of the economy are starting to cool off. Housing starts (which had been very strong) are slowing a bit. Consumer confidence (which largely drives consumer spending - which largely drives the US economy) is also starting to subdue. The drops have been slight though, which is why RPA is not issuing any warnings of recession in the coming months at this time.
While RPA has been cautious for the past year, it has mostly signaled a green light (meaning it was below 50 - which is the better half of all economic conditions).
Since RPA is a math based, mechanical, non-emotional measurement of economic strength - the model is telling us now is a good time to be balanced as an investor. Times could be better, but at least for the short term, there's no reason to be especially cautious. Times are pretty good at the moment, but good times don't last forever - so be sure to keep on eye on this economic indicator next month.
Speaking of not lasting forever... there was snow in Michigan this weekend (and not just "up north" but in lower Michigan too). Maybe winter will take a hint from the economic conditions and signs of summer will emerge soon!