By Leonard Rhoades

Economic conditions have continued to improve modestly thus far in 2010.  Many economists, government officials and strategists continue to believe their remedies for the crisis of 2008/2009 have assured us of a continued recovery…with an expectation of growth in the neighborhood of 3.5% – 4%.

The backbone of the US economy and the conviction behind many of the oracles mentioned above, consumer spending rose 0.5% in January.  Without the consumer and/or the US government stimulus many wonder just how the economy will be able to sustain itself.  Within the January spending report showed that personal income increased by only 0.1%, lending itself to a slow – down in the savings rate.  These among other reports continue to show the consumer is having a difficult time and is tapped out, millions unemployed with no piggy bank in their homes equity.  With so many jobs lost that revolved around housing the question remains if enough is being created elsewhere to offset the defiency?

One bright spot in recent months has been the strength of manufacturing. The first quarter will likely see less robust growth than the latter half of 2009, but currently, risks are to the upside for the factory segment. As goods production settles into a more sustainable growth path after bouncing back from the recent recession, slower manufacturing expansion is not a concern, but rather a sign of longer-run health.

The big news from the Fed in February was its decision to raise the discount rate. While the timing was somewhat unexpected, the move is in line with the central bank’s recent efforts to remove some of its extraordinary measures to backstop the economy as it eroded rapidly in 2008. The change to the discount rate does alter the view of many economists that the Fed will hold the fed funds target at its current low level into 2011. This change was more in line with recent closures of several lending facilities created to give struggling banks access to liquidity. Low interest rates will be necessary for the near term to encourage a self-sustaining recovery, but the Fed also wants banks to stand on their own instead of relying on government for funding.

Our own proprietary signal for the economy provided a normal reading for the month of March 2010 = 44.7

Recession Probability Analytics is a quantitative, completely mechanical and emotion free way of looking at the strength of the US Economy.  When the reading is high, it warns of coming slow – downs and serves as a warning sign to investors.  While its use is flexible, it is generally a good idea to use caution when investing in higher risk US assets, such as stocks and high yield bonds when the reading is in red.  When the indicator reads “above 50″ we feel there is a high probability the US Economy will worsen in the following month, and therefore, stocks should be invested in with caution.  Generally, when this occurs, we reduce stock exposure by 50% on our investment strategies.  When the indicator reads “below 45″ we feel there is a high probability the US Economy is within its normal range and therefore should be able to sustain growth.

• Recession Probability Analytics Factors
• Case-Shiller Home Price Index
• Initial Jobless Claims
• Chain Store Sales
• TED Spread (difference between 3 mth. Labor and t-bill)
• Fed Funds Futures
• Core Capital Goods Orders
• Survey Of Business Confidence
• Consumer Comfort Index