The trouble with mediocrity is that it’s boring. And economic commentators, looking for reasons to explain market behaviour, generally like to make things sound a bit more exciting than they really are.
This can mean that the most recent month’s data point for a particular series can be given a disproportionate weighting by financial markets analysts looking to preempt the next change in direction. This current phase is a case in point. Nice US payroll data and strong retail sales in April have encouraged the ‘soft patch’ theorists to declare yet another oil-induced slump to be over. In our view, evidence that there ever was anything that could be called a ‘soft patch’ is pretty thin on the ground. The fact of the matter is that the economy is amid a weakening trend with normal month-to-month volatility of data sometimes exaggerating and sometimes masking that trend. We continue to believe the ebb and flow of monthly data will generally deliver a disappointing growth outturn relative to the market’s and, more importantly, the Federal Reserve’s apparent expectations, keeping a lid on Fed policy action for most of the second half of this year.
We would, therefore, question any market price action which assumes that events might unfold in a more extreme fashion. On the gloomier side of the coin, for example, Monday’s manufacturing report from the New York Federal Reserve came in significantly below expectations. This series has a pretty good correlation with the trend in the other main industrial surveys (namely the ISM and Philly Fed) but the month-to-month variations can be significant.
With that in mind, we would interpret the New York Fed index’s drop as corroboration of a general downturn in the manufacturing sector, rather than telling us anything new or more worrisome than that. The New York index is given a high billing by the market because of its status as the first manufacturing survey release of the month, but it doesn’t have a long enough history for us to be comfortable that it is robust or consistent enough and it can frequently move in the opposite direction to the more important ISM report. The Philly Fed index is the next key survey release (19th May) – this has a longer history but has been no less volatile of late than the New York survey; and neither of which seem to be helping markets predict what the ISM will do on a month-to-month basis.
For our part, the broad span of lead indicators, from the OECD and Conference Board to the small business report of the NFIB, point to the ISM dipping just below 50 early in the second half of this year. We target an ISM of 49 in Q3 from the current 53.3 mark – but it won’t be a straight line.
Foreign & Colonial Economics Weekl