Recession Probability Update (RPA) // July 2015
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 its 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 only up about 40% (but very volatile); however, when RPA has signaled less than 50 (the "green light" so to speak), the S&P 500 has risen over 95% (and much less volatile). I began publishing the model live in November of 2007.
Since there's now nearly 7 years of data on RPA, the full table was getting a little overwhelming with each monthly update. To see the full archive of RPA history just visit this page.
Here's the past 12 months of RPA (in simplified form):
[table id=23 /]
What RPA is Saying This Month
While 2015 has been a largely sideways and somewhat volatile year, market speaking, the US economy has been consistently strong. For the month of July RPA comes in at 11.92, matching June for the best economic reading I've seen since launching the recession indicator back in 2007.
The only real negative in the past month has been from Greece. Here in the US, however, all major economic indicators are above average to very strong (housing, employment, retail sales, etc).
To play devils advocate, one thing worth pointing out is that there's not a lot of improvement from here, and the stock markets haven't really gone anywhere YTD. So, if the economy doesn't stay strong, perhaps that would be the catalyst for what I believe is an overdue market correction (of the -15% or so variety). Time will tell, and this is just me writing as I think.
Alas, as I've mentioned (many times) before, the stock market is still due for a correction. Stocks have gone up substantially the past few years and have been trending sideways for about 7 months. A pullback from overbought conditions is perfectly normal and happens all the time.
It's just that from an economic perspective, a pullback would be just that, and not necessarily the sign of a full blown recession. Each pull back we've had over the last year has been modest, with most just 4% to 8%. I fully expect we'll get a real pullback eventually, which would be more like 10% to 15%. It may happen soon (in fact, it may have already started), or may not happen for a few more months (or longer). Either way, stay tuned to blog updates for warning signs.
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 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.