On Friday, we will get our first look into 2Q U.S. GDP. Estimates call for 1.5% growth over the first quarter.
The second quarter was characterized by consistent misses in important macro data, with particular contractions in ISM manufacturing, and global PMI data. Some huge misses in regional Fed data also made headlines.
Let's take a look at some of the key global data points and then work back to the U.S.
China Slows Markedly
- HSBC PMI data shows nine straight months of a contracting manufacturing sector.
- Chinese GDP comes in at 7.6%, slowest since the recession. Many argue that real GDP is probably closer to 7% when one considers electricity usage and industrial production figures.
- Export growth weakened significantly; UPS cited double digit declines in Asian exports.
Europe Implodes
- Manufacturing PMIs continue to contract; the EU-wide manufacturing PMI has declined for 11 straight months, with contractions in the "core" nations of Germany and France accelerating significantly:
(Click to enlarge)
- EU unemployment at record high 11.1%.
- Spain receives $100 billion bank bailout, though it has not yet received the cash.
- Spain's borrowing costs soar to Euro-era high.
- Contagion spreads back to Italy, as 10-year bonds approach highs and short-term bonds warn of impending bailout request or restructuring.
- Euro weakens considerably, having negative effects on multinationals (USD strength).
Brazil And India Also Slow Significantly
- Brazil, the beneficiary of lots of "hot" emerging market inflows, is now expected to grow only 2.5% this year.
- Indian GDP growth is at a nine year low of 5.3%.
- The slowdown in growth from the BRICs is a key difference in this year's EU crisis flare-up.
U.S. Data Points
- Durable goods dropped 0.2% in April, rose 1.1% in May, and are expected to have risen 1% in June. Excluding auto sales, the numbers are much weaker.
- ISM Manufacturing data contracted in June for the first time since the recession, with new orders plunging. The employment index, however, remained steady and did not indicate a recessionary environment.
- ISM Services in June came in at 52.1%, showing solid, but slowly accelerating growth.
- Richmond Fed manufacturing survey had an abysmal -17 print.
- Philly Fed Contracted.
- U.S. Inflation, or the CPI, was negative in May and flat in June. Is running at 1.7% annual pace indicating weak consumer demand.
And the key data point:
- After averaging 226 million in monthly payroll gains for Q1, Q2 averaged a mere 75 million in gains. This is largely due to the massive seasonal distortions caused by the warm weather in Q1, and of course, a weaker global economy.
Conclusions
Friday's GDP print will set the tone for the next several months of trading. A number in-line with estimates will probably keep us in a trading range on the Dow of about 12,300-12,800.
A miss closer to 1% or below could open up a new floor on this market; earnings estimates are already in decline and GDP growth that is sub 1% would require subsequent earnings revisions.
While ISM data for both manufacturing and non-manufacturing came in light, the employment components of both indexes were reasonable, in spite of very weak payroll data. I suspect that payrolls are still "giving back" a lot of the gains from the seasonal distortions they enjoyed in Q1.
Recent regional Fed data has been shockingly weak, and point to further contractions in U.S. manufacturing. While the U.S. economy is almost 90% a service-based economy, the weakness is indicative of poor international demand for our industrial goods, and probably weak domestic demand for durable goods, with the exception of autos.
I expect Q2 GDP to be between 0.8 and 1.2%. That's a pretty big range, but any figure in that range is reflective of a substantially weakening US economy.
I don't believe we are in a recession quite yet, but if current economic trends continue for another quarter or two, we are likely to enter into one by 2013.
As a result of my below-consensus estimates, I'm still short the S&P SPDR ETF (SPY).
Disclosure: I am short SPY. Short via Puts.
