The economy is improving after a weak first quarter. We have a time-tested model to help predict recessions, and this month it tells an encouraging story.
In May, our leading indicators rebounded to 64 following three months at the neutral 50 level. Combined with a solid 84 reading from our cyclical score of leaders, our model suggests the risk of a recession in the next six to 12 months has receded.
Inflationary pressures firmed in the latest month as 12 of our 23 indicators show rising pressure versus nine last month. While this suggests the possibility of acceleration in the CPI, the outlook for inflation remains generally benign.
Fed policymakers claim to require confidence that inflation is headed back towards their 2 percent objective, but their own forecasts show expectations for core personal consumption expenditures prices in 2015 have declined. Nevertheless, a rate increase seems likely sometime in the second half of 2015, but the pace of rate increases is likely to be slow.
Moderate economic growth should support continued growth in private nonfinancial-sector debt. That, along with rate increases, should make lending more profitable. Corporate debt issuance helps investment banking while rising equity prices boosts brokers and insurance companies. Overall, the economic environment should be favorable to financial services companies over the next few quarters.