I’ll get right to it.
Regardless of what the Federal Reserve Chairman – Jerome Powell – says about the economy (from yesterday’s press meeting) – things really do look bleak.
And to give you some perspective – these three leading-indicators (economic factors that change before the rest of the economy does) show just how bad the negative momentum in the world economy is.
First – the recent U.S. Manufacturing PMI (purchasing managers index) declined to 50.1 in early June – its lowest point in 117 months (September 2009).
Other readings from the recent IHS Markit report showed:
The U.S. Services Business Activity Index fell to a 40-month low (down to 50.7 from 50.9 in May). . .
The U.S. Manufacturing Output Index fell to a 37-month low (down to 50.2 from 50.7 in May). . .
And the U.S. Composite Output Index fell to a 40-month low (down to 50.6 from 50.9 in May). . .
(Note that a reading above 50 indicates expansion. And below 50 indicates contraction).
This is all important because the U.S. PMI’s one of the most historically accurate leading-indicators for estimating growth.
Or – said otherwise – U.S. growth follows the general trend of the PMI.
Take a look at the correlation in the chart below. . .
Thus – with every PMI index about to dip below 50 – indicating contraction – it’s likely that the U.S. GDP’s right behind it.
Second – another key U.S. indicator – Morgan Stanley’s Business Conditions Index (MSBCI) – collapsed in June.
To give you some context – the MSBCI is Morgan Stanley’s proprietary measure of various economic indicators and sub-indexes (which range from services to manufacturing – and gauges hiring, capital expenditure, and pricing power).
It fell by 32 points in June – its largest one-month decline (and down to its lowest level since 2008).
According to Morgan Stanley – the June reading showed notable declines in hiring, hiring plans, capital expenditures plans, and business conditions.
Thus – this sharp drop in the MSBCI signals deteriorating business sentiment – which is very important as it feeds into major corporate decisions.
This helps explain why businesses have been reluctant to expand this year.
For instance – U.S. capital expenditures (aka CapEx) hit 11% in 2018 as corporate profits surged during the first year of Trump’s Tax-Plan (which reduced the corporate tax rate from 35% to 21%).
But this year – 2019 – U.S. CapEx growth will sink to barely 3%.
This isn’t an encouraging sign. Especially since CapEx is a ‘crude’ – yet important – indicator of future corporate profits.
And according to Krishna Memani – vice-chairman of investments for Invesco – “if the current trend in CapEx doesn’t improve, profitability and productivity will deteriorate, putting economic growth and US stock market performance in jeopardy…”
(I’ve written about a global earnings recession many times over the last year – one that I expect to worsen over the second half of 2019).
Therefore – the MSBCI’s sharp plunge down indicates trouble ahead in the corporate world at the current pace.
Third – the Cass Freight Index (aka CFI – a broad measure of freight shipments and volumes across all modes of transportation) recently dropped -6% year-over-year in May (following -3.2 in April).
This marked the sharpest year-over-year decline since 2009.
And it has now dropped year-over-year for six straight months – with no sign of reversing.
(Note that the CFI’s a historically accurate leading-indicator for both economic expansions and contractions).
This shows that there’s a slowdown in trucking and transportation in the U.S. – which has added to the slowdown in global trade (which has been especially harsh in Asia).
So – in summary – these three important leading-indicators signal that the U.S. and the global economy are now in the ‘late-cycle’ of economic growth. And that the momentum is still downwards.
This means that the next step – most likely – will be a worldwide recession (or at-least ‘stagnation’ – meaning minimal-to-flat growth).
Powell and the Fed want to ‘wait for clearer signs’ before they begin cutting rates. But by then it may be far too late.
Now – I personally believe the Fed will begin cutting rates before year end.
But the question is: will that be enough?
Like I’ve written many times before – studies have shown that the Fed needs to cut rates by at-least 3% (300 basis points) to stimulate the economy out of a recession.
But with the Fed Funds Rate (FFR) currently at 2.50% – this will put them immediately into negative territory by 0.50%.
Maybe that’s why Powell doesn’t want to waste any rate cuts until he absolutely needs to. Because he won’t have much room left to cut before he must go negative. (Which has never happened before in U.S. monetary policy).
As always – time will tell.
