We track a wide swath of U.S. economic data to monitor the economy from multiple angles, writes Landon Whaley.
We initially rolled out the U.S. Shift Work theme in April 2018 as we began seeing evidence of what we believed was the beginning of a shift from the second longest economic expansion in U.S. history into a growth-slowing regime. As is typically the case, it took a few more months for the new macro theme to take hold, which it did in Q4 2018. This macro theme has gotten us paid on the long and short side of U.S. markets for the last 10 months, and it will continue to do so as we traverse the second half of 2019.
Growth Says What?
We track a wide swath of U.S. economic data to monitor the economy from multiple angles and to provide a system of checks and balances for Fundamental Gravity developments.
One of the most critical data sets we monitor is the ISM Manufacturing PMI because it has historically been a very good indication of the trajectory of U.S. GDP as well as a leading indicator for the direction of the U.S. stock market. Based on May’s data, the ISM Manufacturing PMI fell for the second month in a row, the sixth month in the last nine and is now at the lowest level in three years. Another measure of manufacturing activity, the Markit Manufacturing PMI, hit the lowest level in 117 months based on the flash estimate for June.
On the service side of the economy, the two primary data sets are the IHS Markit Services PMI and the ISM Non-manufacturing PMI. Despite being in prolonged downtrends that began in May 2018 and September 2018, respectively, these indicators showed conflicting signals in May. The Markit Services PMI fell off a cliff declining from April’s 53.0 to just above contraction at 50.9, and the flash estimate for June saw another leg down to the lowest level in 40 months. On the flipside, the ISM non-manufacturing PMI had a one-off bounce from two-year lows in April.
The list of data that is confirming the U.S. slowdown is extensive and includes durable goods orders, retail sales, the retail sales control group, export, and import growth, Philly Fed index, Empire State Manufacturing Survey, University of Michigan Consumer Sentiment Index, and total U.S. auto sales, just to name a few.
Despite what the government would have you believe about growth during Q1 2019, U.S. growth has been slowing steadily since October 2018 and the data over the last few months not only confirms this economic reality, but it shows that the deterioration in growth is accelerating.
Inflation Says What?
After a two-month bounce from February’s low of +1.5% to +2.0% in April, U.S. consumer inflation slipped back to +1.8% in May. The pace of consumer inflation has now slowed in seven of the last 10 months. After a one-month acceleration in core inflation from March’s +2.0% reading to +2.1% in April, it slipped back down to +2.0% in May. Core inflation has now fallen 16% since peaking at an 11-year high back in July 2018. Producer prices also declined in May, falling for the fifth time in the last 10 months. More importantly, producer prices have fallen 47% since peaking at a seven-year high last July. And the final deflationary nail in the coffin, May’s import price growth slowed for the eighth month in the previous 11 and contracted for the fifth time in the last six months.
The most critical inflation gauges are confirming that the slowing inflation regime that began last summer is gaining downside momentum once again. Couple the economic data with what markets have been telling us in real-time since the beginning of May, and it's clear that a battle with White Walkers is coming in Q3.
The Bottom Line
U.S. growth and inflation are both slowing, and U.S. corporations are hurtling towards an earnings recession.
On the long side, we’ll focus on REITs and utilities, as they are two of the best performing U.S. equity sectors in Winter markets. We’ll also be aggressive buying long-dated Treasuries on pullbacks from here.
On the short side, we’ll press short exposure in financials, basic materials, and small-cap stocks.
There is no question that Winter is here; trade accordingly.
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