Economic Outlook: Growth Is Hitting New Lows

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by: Leo Nelissen
Summary

My current growth slowing call continues to be supported with further weakness in the US economy (and abroad).

Key leading indicators continue to hit new lows and are not very likely to bottom on the short-term.

My biggest position continues to be cash as I expect cyclical assets to underperform going forward.

It's the start of a new month again, which means it's time for an economic outlook article. In this article, I will cover a set of leading economic indicators for the US, Eurozone and China. These indicators are purchasing manager indices, which means they tell us what we can expect in terms of 'hard' economic growth over the next 3-6 months. In this article, I once again have bad news as my global growth slowing call continues to be confirmed by lower expectations in the US and Euro Area. It seems that times might get a lot more difficult after a series of strong years.

Source: Author

The Trend Continues

Before I continue, I have to mention a few important things. First of all, I am discussing leading indicators. These indicators are mainly based on surveys that tend to predict economic growth. In case of manufacturing PMIs like the ISM manufacturing index, a value above 50 indicates growth while a value below 50 does the exact opposite. If you want a full breakdown of the usefulness of leading indicators, feel free to read this article I wrote a while back. The second point is that I only care about trends. I often get comments like "what are you talking about, the US economy is fine". These comments are true. The US economy is doing quite well indeed. It's just that we are dealing with a downtrend of expectations which is what traders care about. It's not the point we are at, but the direction of the trend.

And speaking of trends, let's get to the first and probably most important graph of this article. In last month's article, I warned that the economy had not bottomed despite a solid uptick of sentiment (ISM index). Unfortunately for the economy, I was right. The ISM manufacturing index dropped 2.4 points to 54.2 in February. This is a 3-year low and another lower low in the current growth slowing cycle.

We see that regional manufacturing surveys were right indeed last month when they did not support a higher ISM value in January.

Furthermore, this trend is more than confirmed by new orders. New orders declined 2.7 points to 55.5. This is still a strong number, but look at the trend. New orders are falling off a cliff while regional new orders indicate a further decline to the neutral 50.0 zone.

Additionally, I want to show you the less volatile future capital expenditures graph. This graphs is the least volatile indicator I monitor but the best indicator to use when tracking the business cycle. After months of steady growth at high levels, we currently see that capex is rolling over. This makes sense given that general economic growth is under pressure.

And last but not least: shipments. Shipments are the weakest indicator with growth close to 2015 bottom levels. Last month I had to double check whether I made a mistake while calculating the index. Unfortunately I did not, and these numbers are real. This might explain why shipments of capital goods (ex. aircraft) growth declined from more than 10% in 2018 to currently 3.2% (source).

The bad news does not end here: the German manufacturing PMI has declined to 47.6. This is the lowest growth rate in 6 years and quite scary news given that Germany used to be the growth engine of the Euro Area. It is almost a certainty that industrial production will continue to decline in Germany, which should hurt this manufacturing/export-focused economy.

Source: TradingEconomics

The best news of this article is that China's slowdown has gotten a slight uptick in February. The manufacturing index has improved from 48.5 to 49.9 in February.

Source: TradingEconomics

Takeaway

The growth slowing trend continues. There is no denying that the pressure on hard economic growth (indicators) like industrial production, retail sales etc. is rising both in the US and Europe. This makes it very likely that defensive investments should outperform cyclical investments over the next few months.

I expect to see lower industrial production in the US going forward and further contraction in Germany and the Euro area in general.

All things considered, I am sticking to the few sentences I mention in most of my articles that cover cyclical stocks. The time to buy will come, but it's not now.

Stay tuned for further updates!

Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!

Disclaimer: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.