Per our 1Q14 Macro Themes presentation:
“After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.”
Focusing on the first part of that outlook, this week we received a fair amount of data that confirmed our forecasted #Quad4 setup in the fourth quarter of 2014, none larger than today’s Q4 GDP release. Key highlights:
- Real GDP growth decelerated -20bps to +2.5% YoY
- The GDP deflator decelerated -40bps to +1.2% YoY
- “C” accelerated +10bps to +2.8% YoY, though this preliminary estimate is likely to get revised down if/when DEC PCE data is reported, assuming the DEC data tracks the deceleration in Retail Sales growth
- “I” was mixed with Nonresidential Fixed Investment growth decelerating -100bps to +4.9% YoY as Residential Fixed Investment growth accelerated +330bps to +2.6% YoY
- Inventories contributed a sizeable +80bps to the headline QoQ SAAR growth rate of +2.6%, which itself decelerated from +5% in 3Q14
- “G” accelerated +40bps to +0.7% YoY
- “Ex” decelerated -180bps to +2% YoY
- “Im” accelerated +190bps to +5.3% YoY
Second derivative trends across a variety of key high-frequency economic indicators imply much more weakness in the domestic economy than the preliminary -20bps deceleration in Real GDP growth suggests:
For example, Industrial Production growth is slowing on a sequential basis while CapEx growth is slowing on a trending basis:
Export growth slowing on both a sequential and trending basis is clearly weighing on both reported and prospective Corporate Earnings growth:
Slowing Corporate Earnings growth on both a reported and prospective basis is perpetuating a deceleration in Employment growth:
Lastly, Import growth slowing on both a sequential and trending basis and is continuing to weigh on reported and prospective Inflation:
Net-net-net, the U.S. remains a +/- 2% economy. All of the conjecture surrounding "+3-5% growth" is horribly misguided -- at least according to the data.
Moreover, everywhere you look across the compendium of high and low-frequency economic data, #Quad4 is ringing true. According to our empirical studies, this is precisely why interest rates continue to make new lows and bond proxies continue to outperform within the domestic equity market.
All it not dour, however. Specifically, the probability of a #Quad1 setup in the first quarter of 2015 is high and rising with the release of the first batch of JAN high-frequency economic data.
While late-cycle manufacturing continued to show weakness per the Markit PMI data, services sector growth posted a solid sequential acceleration, which led the composite index higher:
This dynamic is supported by meaningful sequential and trending accelerations in the Conference Board’s Consumer Confidence Index and in the NFIB Small Business Confidence Index:
It’s clear that “Main Street” America favors the trend of reported disinflation and layering their confidence and activity on top of an extremely easy base effect for Q1 GDP is likely to produce a 2-4 month trend of #GrowthAccelerating data in the U.S.
That said, however, the probability that we tip right back into #Quad4 for the Q2 and potentially for Q3 (depending on how the U.S. dollar trades from here) is equally elevated.
Worst of all, by then the domestic labor market could be showing a clear trend of deterioration that may not inflect until we’re the other side of the next U.S. recession.
Good luck risk managing this likely turn in the domestic macro narrative. We genuinely mean that – it won’t be easy! Let us know how we can help.
Enjoy your weekend and Go Hawks!
Associate: Macro Team