Three quick points around today’s domestic Macro data:
Spill Over? The bullish foil held out against the ongoing industrial recession has been the purported strength in the services economy. With the ISM Services reading sliding for a 4th consecutive month in February, the Markit Services PMI contracting for the first time since 2009 (outside of Gov’t shutdown) and the Chicago PMI (which includes both manufacturing and services) holding in contraction, that narrative weaving is slowly unraveling.
Yes, the industrial data is showing some fledgling sequential stabilization – 12 consecutive months of negative growth will do that to a comp. But as it stands, Forward Capex Plans remain in decline, C&I credit is tightening, Small Business lending is in retreat, CRE lending is decelerating and aggregate income growth for consumers is slowing.
Less bad is good but generally only if you have a catalyst and a fundamental underpinning for some amount of sustained improvement. It’s hard to argue a sequential base-effect stabilization in manufacturing, in isolation, as a durable catalyst. Indeed, the inability for weak demand, slowing income growth and tighter credit to support a sustained advance in investment and industrial activity feels like a tighter thesis than ‘easy comps’.
In short, services consumption represents ~65% of household spending and ~45% of GDP so the trend obviously matters. Peri-contractionary manufacturing activity and decelerating service sector activity is not an escape velocity macro factor cocktail.
It’s the Cycle Silly! We’ve been in full broken record mode on this of late but month-to-month, counter-Trend oscillations in prices/fundamentals don’t obviate the reality of the cycle. Employment Growth, Income Growth, Consumption Growth, Consumer Confidence and Corporate Profits all peaked in 4Q14/1Q15. Not incidentally, all things equities peaked in 2Q15.
Employment growth will continue to slow from here and unless you believe wage growth will continue to accelerate significantly faster than employment growth declines then the math says aggregate income growth will continue to decelerate and the peak in consumption growth will remain rearview. Summarily, the prevailing negative 2nd derivative Trend across each of those macro factors will continue.
Super Huge & Big (Conclusion): Tomorrows NFP number might be worse sequentially … or it might be better. We don't know and don't claim to have any particular edge on the monthly number. One could argue that Gold is signaling the former …. Treasury yields the later. Fortunately, on a medium-term duration, the investment conclusion is largely the same.
- If the data continues to deteriorate, in spite of favorable seasonal and comp dynamics, lower-and-slower-for-longer and its associated allocations continue to work.
- If the data gets an optical boost – edifying policy makers conviction around their hawkish lean - we’d expect the further attempts at policy normalization to perpetuate the same deflationary and growth prohibitive forces that have characterized the last 8-months.
Christian B. Drake