Economic Growth Has Not Hit Bottom YetNovember 21, 2019
Even as left tail risks to US and global economic growth seem to have been mitigated over recent weeks (more accommodate financial conditions, rising of some PMI data, worst case trade outcome seemingly a lower probability now), incoming data continue to suggest the nadir of this slowdown cycle has not yet been reached. This is of importance since many measures of stock market exuberance seem to be simultaneously elevated (elevated RSI, lack of put option buying, etc). Thus, there remains the possibility that stocks in particular are susceptible to a re-calibration of economic growth/earnings expectations.
Take, for example, leading indicators produced by the Conference Board and OECD in charts one and two. The Conference Board United States LEI remains in a downtrend and is pointing to basically zero growth. The OECD global LEI just made a new lower low to a level not seen since 2009.
Transportation related data also continue to show signs of weakness. Transport data are of interest since they are 1) timely and 2) not subject to as many measurement errors and revisions as other economic data. Railroad carloads are declining at a 4% clip on a year-over-year basis (chart 3) while port traffic data out of the west coast are showing either outright declines or a slowing growth trend.
Meanwhile, the Phili Fed PMI that was just released today showed the opposite of what we should have seen if growth had bottomed. The new orders component fell from 26 to 8 when it should have either remained about the same or risen.
All this suggests we are still waiting to see the bottom in the economic data and by extension we are still in a period of elevated near-term risk for financial assets.