Tuesday , 22 October 2019

Growth Slowing: Expecting 2009 Lows Once Again

…I am feeling a bit sick after updating my monthly economic outlook…[which shows] that things are getting worse…[and] now dealing with expectations at 2009 lows. Yes, that’s not a mistake unfortunately. In this article, I am once again reiterating my growth slowing call and tell you what’s next.

…The two indicators I will be discussing [here] are the ISM manufacturing index as well as an average of regional FED manufacturing surveys. These indicators tell us what is going to happen while GDP growth tells us what has happened. #munKNEE/Money!

  • The just released ISM index shows that the index has fallen from 49.1 in August to 47.8 in September. Note that 50.0 is considered a neutral level. Above 50.0 means a growing economy and values below 50.0 indicate contraction so we are now in a scenario where we went from growth slowing to contraction acceleration. However, as that sounds ‘weird’, I will stick to contraction.

  • Although regional manufacturing surveys were weak as well, I did not expect a sudden drop below 48.0 in September to be completely honest. We are now at levels not seen since the summer of 2009 when the economy recovered from one of the most devastating recessions of modern history. This almost certainly means that hard economic data like industrial production is going to follow as well. So far, industrial production managed to stay above contraction levels.

Unfortunately, given the development of leading indicators, I am almost certain industrial production will go negative in Q4. The question is how bad it will get.

Speaking of getting bad, regional future capital expenditures continued their breakdown in September. There is no denying the business cycle has turned; I expect further pressure on capital orders and am eager to hear what large machinery providers have to say in their Q3 earnings calls.

Speaking of expectations, it sure is going to be interesting to see what unemployment numbers are going to do next Friday as well as in the weeks ahead. The number of businesses reporting lower employment (graph below) has hit 2016 highs. Back then, we did not see significant employment losses and I doubt this will be the case next Friday. This is just an important development to keep an eye on as it could hurt this late-cycle stage employment situation.

…The graph…[below]…shows the 4-week average growth rate of Union Pacific (NYSE:UNP) transportation volumes. The just released data for week 39 shows that ‘growth’ on a 4-week average has hit a new low at -12%. America’s largest railroad operator is feeling the pressure and should report very interesting results in the third quarter.

Source: Author’s Spreadsheets (Raw Data: Union Pacific)

…I have one more graph to show you. This one won’t be pretty though. Deutsche Bank expects a further ISM decline based on the new export orders trend but, so far, it is too early to say if this will indeed be the case. However, one driver of weak exports is the strong dollar and, unfortunately, the dollar is also the go-to currency when times get tough – meaning that pressure is likely to last if the FED does not aggressively start cutting interest rate…soon.

The Bottom Line

I am glad my indicators are still working simply because it prevented me from buying cyclicals. Unfortunately, [however,] the fun of being right is gone at these levels. We are likely going to get a wave of bad ‘hard’ economic indicators like industrial production, new durable goods orders and maybe even employment.

There is only so much someone can do. In this case, I am sticking to cash (67% of my ‘net worth’). I will start buying again once the economic situation starts to turn. For now, I think we should be prepared for a very tough third quarter earnings season.

Don’t panic…[just] be prepared by not taking on too much risk (cyclicals). That’s the best, and maybe even the only way to play the current situation.

Editor’s Note: The above excerpts from the original article by Leo Nelissen have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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(The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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