NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU…

Takeaway: We remain the “low on the Street” w/ respect to Q3 and Q4 GDP and continue to expect a negative re-rating of consensus growth expectations.

Today at 8:30am EDT, the BEA will release its advance estimate for Q3 GDP. There is a distinct possibility that this pre-midterm election print has the potential to appear optically strong; there is also a distinct possibility that any strength is likely to be conveniently revised down on November 25th (second estimate) and/or on December 23rd (third estimate)...

 

Ignoring all of that, we remain content to side with our models and the data, which continue to suggest domestic economic growth slowed in the third quarter and is likely to continue slowing here in the fourth quarter.

 

Our GDP estimates for Q3 and Q4 both have 1-handles; only one of the 84 Bloomberg contributor estimates for Q3 has a 1-handle and only four of the 84 Bloomberg contributor estimates for Q4 have a 1-handle. On a median basis, the Street is expecting +3% QoQ SAAR for both quarters – the same figure consensus is expecting for each of the next six quarters!

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - Conensus GDP Estimates

 

The sell-side is forecasting one helluva recovery; hopefully these GDP estimates aren't underpinning bottom-up modelling expectations for metrics such as Facebook's ad revenue growth across the buy-side...

 

Our GIP Model: Bearish

Like growth, we anticipate that reported inflation will also continue to slow and the confluence of this double-negative from a 2nd derivative perspective puts the U.S. economy squarely in #Quad4 on our GIP Model – which is an expectation we’ve gotten increasingly loud about at every opportunity since early August:

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - UNITED STATES

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - BREAKEVENS

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - US CPI MODEL

 

The Data: Bearish

Moving along – if for no other reason than the fact that it’s late on the east coast and I’d like to get some rest – let’s quickly go through a series of the most relevant high-frequency growth indicators as it pertains to our expectations for Q3 GDP and our outlook for the current quarter (and beyond).

 

Manufacturing PMI (we like to use the Markit data series because it’s both seasonally adjusted and usually released over a full week ahead of its widely-followed ISM counterpart): Decelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - MANUFACTURING PMI

 

Services PMI (we like to use the Markit data series because it’s both seasonally adjusted and usually released over a full week ahead of its widely-followed ISM counterpart): Decelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - SERVICES PMI

 

Economy-Weighted Composite PMI (we like to use the Markit data series because it’s both seasonally adjusted and usually released over a full week ahead of its lesser-known ISM counterpart): Decelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - COMPOSITE PMI

 

Industrial Production: Accelerating on a sequential basis; decelerating on a trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - INDUSTRIAL PRODUCTION

 

Real Wages: Accelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - REAL WAGES

 

Retail Sales: Decelerating on both a sequential and trending basis. So much for the Consensus Macro “gasoline tax cut” narrative…

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - RETAIL SALES

 

Consumer Confidence: Accelerating on both a sequential and trending basis. In the context of secular trends, however, this strength is a total head fake and indicative of where we are in the economic cycle (i.e. late).

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - CONSUMER CONFIDENCE

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - Consumer Confidence Retracement

 

Business Confidence: Decelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - BUSINESS CONFIDENCE

 

Exports: Decelerating on a sequential basis; accelerating on a trending basis. Recent weakness is unlikely to subside with #StrongDollar, #EuropeSlowing, #JapanSlowing and #ChinaSlowing all occurring simultaneously.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - EXPORTS

 

Imports: Decelerating on both a sequential and trending basis. With import price growth running at -0.9% YoY, this weakness is not indicative of the “credit-driven resurgence in consumer demand” or the “strong holiday shopping season” Consensus Macro keeps telling bedtime stories about.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - IMPORTS

 

Durable Goods: Decelerating on both a sequential and trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - DURABLE GOODS

 

Nonfarm Payrolls: Accelerating on a sequential basis; decelerating on a trending basis.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - PAYROLLS

 

Jobless Claims (NSA YoY): Decelerating on both a sequential and trending basis. This strength should be tempered by the fact that claims are fast approaching frictional resistance of ~300k on a trending basis, which implies a recession is likely just 2-4 quarters away.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - JOBLESS CLAIMS

 

Investment Conclusion: Bearish

After this highly objective look at the data (please email us if you disagree with the methodology and have a better way to analyze it), it’s clear to see that U.S. growth is slowing and the broad-based decline in sequential momentum across a variety of indicators implies further slowing – especially in the context of a more-stringent base effect here in Q4.

 

Unfortunately for consensus bulls, the Fed just took away its QE drugs, and, in the context of the FOMC’s newfound emphasis on “data dependency”, our analysis suggests it could be at least 2-3 months before they sign off on more easing.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - MONETARY POLICY MODEL

 

On that note, it’s worth reminding investors that: A) #Bubbles in small-to-mid-cap illiquidity tend to misbehave #Quad4; and B) short-IWM/long-TLT remains our highest conviction macro call of the year – after having made the exact opposite call throughout 2013.

 

NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU… - R2K

 

Good morning to our subscribers across Europe. Good night to those still grinding away on the West Coast; we are looking forward to visiting you next week.

 

DD

 

Darius Dale

Associate: Macro Team


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