I have been writing for the last several months about the weakness in my economic models and how it was likely the US business cycle was peaking in 2018.    The implication has been that we should expect a slowdown in US economic growth and, well, it looks like it has arrived.  The growth rate in US GDP has slowed from 3.4% in Q3 2018 to 2.6% in Q4 2018, and the real-time forecast from the Atlanta Fed's GDPNow model is barely positive  The estimate stands at just .25% growth for Q1 2019. 



Below is an updated version of my weekly economic model.  This model began to fall off very sharply in October 2018 and actually turned slightly negative in early December.  Typically when that happens, as I have noted in the chart,  we can expect some kind of a central bank response to the weakening economic conditions.   This time was no exception and the actions were dramatic, especially from China. 



It appears, at least for now, those efforts may help avert negative GDP growth in early 2019 as the model has shifted to a slightly positive growth rate again.   Does that mean we are off to the races again for US growth?  This will be one of the many scintillating questions we will try and answer at the ALMEdge users conference on April 5th.  You can visit the event website for more information and to register.  Hope to see you there.

Today the National Federation of Independent Business (NFIB) released their Small Business Optimism Index.  While the index had a slight dip this month, it remains near its record high.  It is likely this is the bullish slant you will read about today.  However, for those of us data nerds who knows the gold lies buried deep, there is an ominous warning underneath the headline data that is important for bankers to be aware of. 

As all of us know, positive earnings and cash flow are very important for loan performance.  Back in 2016, I introduced to you the "Small Business Profit Indicator" developed by Rcube.  This is a great model for getting a sense of the likely future direction of small business profits.  As you can see in the chart below, for only the 5th time since 1984, my revised version of this model has issued a profit recession warning.  In my opinion, this is a solid confirmation of the sudden and dramatic drop in stock prices we have seen recently.  Has the market priced in enough?  It certainly got the Fed's attention, does it have yours?

If you look back over the last few blog posts, you will see I have been talking about being keenly aware of changes in your environment.  There are some very important financial indicators bankers should always pay attention to, in order to help them navigate this challenge.  Back in September, I posted a blog post about the most important sign to watch for, an inverted yield curve.  When the curve inverts, it is rarely a good sign for the future of the U.S. economy.  Unfortunately,  there are now  portions of the yield curve that have inverted.  A curve inversion, accompanied by other warning signs (such as bear markets) REALLY needs your attention.  Since September, we have had two bear markets begin; one is stocks and the other in bonds.  The S&P500 has fallen 20.21% peak-to-trough since September and at the same time, bond yields have fallen 20.06%.  Why?

Below is my weekly economic model.  It contains some very economically sensitive daily and weekly data inputs that have a high correlation with economic activity.  As you can see, it is now negative and at its lowest level since 2007.  This likely highlights what bonds and stocks are reacting to.  This is a very important development in my opinion.  



I have highlighted times in the chart where this model has been flirting with/gone negative.  As you can see, the Fed responded to these weaker economic conditions with EASING monetary policy, not tightening.  I will be focusing on my longer-term models for confimation of this model's message.  This model is alerting us to a potentially dramatic economic slowdown in the next couple of quarters.  Will it evolve into something worse?  Will the Fed continue to tighten monetary policy in the face of these headwinds?  These will be big discussion topics at April's ALMEdge User's Conference.  Keep an eye out for registration materials and hope to see you there!