Small Business Optimism Shatters Record Previously Set 35 Years Ago
BTW, manufacturers are also not rushing to boost capex (The Daily Shot)
Another BTW: Nice to plan more hires but at some point you must pay up to get them and sacrifice some profits:
Inflation adjusted ECI has decelerated:
And just so you know, there is a very close link between the NFIB Optimism Index and the Conf. Board’s Consumer Confidence Index:
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Economic Confidence Is Really High. Perhaps It’s Time to Sell. Rather than look to the future, investors tend to extrapolate the recent past, and mostly get it wrong, writes James Mackintosh.
(…) Since 1974 there’s been a 48% positive correlation between the change in the Conference Board consumer confidence index and stock prices over the previous 12 months, meaning stocks have a fairly strong tendency to rise when consumers feel more positive. This should surprise nobody. Yet those who buy because of past changes will find a slight negative correlation between consumer confidence and returns over the next year—because confidence typically doesn’t keep on improving (or worsening). (…)
Buying stocks when confidence or growth is extremely high or selling when they are extremely low works even less well, because from extremes both tend to snap back a lot further. The current levels are truly extreme, with consumers more buoyant only during the excesses of the late 1960s and the late 1990s. Both times ended badly for shareholders when bubbles popped. (…)
U.S. Consumer Credit Use Accelerates
Consumer credit outstanding increased $16.65 billion (4.6% y/y) during July after rising $8.47 billion in June, revised from $10.20 billion. A $14.0 billion gain had been expected in the Action Economics Forecast Survey. During the past ten years, there has been a 51% correlation between the y/y gain in consumer credit and y/y growth in personal consumption expenditures.
Nonrevolving credit usage increased $15.38 billion (4.7% y/y) during July after a $9.64 billion June rise. Federal government borrowing (42% of the total) rose 8.4% y/y. Revolving consumer credit balances recovered $1.25 billion in July (4.4% y/y) following a $1.17 billion June drop.
Global growth close to two-year low in broadening slowdown
Global economic growth edged lower in August, according to the latest PMI surveys, down to its second-weakest for nearly two years. The surveys also brought signs of an export-led slowdown spreading to other parts of the economy, including weaker growth of business investment and consumer spending.
The headline JPMorgan Global Composite PMI, compiled by IHS Markit, fell from 53.7 in July to 53.4, its second-lowest since November 2016.
On one hand, despite the fall, the latest reading is only marginally below the 53.8 average seen in 2017 and remains indicative of global GDP rising at a solid annual rate of 2.5% (at market exchange rates). Future expectations improved slightly, albeit still the second-lowest seen so far this year.
On the other hand, manufacturing output growth continued to run at one of the weakest rates seen over the past two years, stymied by a further near-stagnation of global trade flows. Global export orders barely rose for a fourth consecutive month in August.
Furthermore, in a sign of weakness spreading beyond the export sector, August also saw worldwide service sector business activity grow at the slowest pace for five months, also registering one of the softest performances seen over the past two years.
Developed world output growth hit the second-slowest since November 2016, reflecting weakened services expansion alongside relatively subdued manufacturing growth. The US was the best-performing major developed economy for the fourth successive month, though an easing in the rate of growth meant the gap closed with the UK and Eurozone. Japan again saw the weakest (albeit still solid) expansion.
Emerging markets meanwhile grew at the slowest pace since last October, as weaker services growth matched a factory sector stuck in a low gear. Of the four largest emerging markets, only Russia saw faster growth. Growth slowed in both China and India, but Brazil was the worst performer, suffering the second-largest output decline seen in the past year-and-a-half.
So far this year, new order growth has waned compared to last year for most broad industry categories covered by the PMI surveys. The main exception is consumer services, which hitherto had been a key area of support to the global economic upturn. However, comparing the latest three months to August with the prior three months, it’s consumer services that has lost the most growth momentum, suggesting even this sector is now starting to struggle.
A further sector notable in terms of its slowdown is machinery & equipment manufacturing, as this sector is a bellwether of wider capital spending. The machinery sector has seen order book growth cool sharply since the start of the year, culminating in August with the smallest monthly gain in new orders since September 2016.
Not all sectors are struggling, however, with technology and (to a lesser extent) financial services being notable out-performers in August.
While slower export growth has been commonly attributed by PMI respondents to rising concerns regarding tariffs and trade wars, some of the recent slowing in demand has also been linked to rising prices. Average prices charged for goods and services rose globally at the joint-fastest rate seen since the global financial crisis in July, easing only modestly in August. However, the rate of increase of average prices charged for consumer goods accelerated further in August, highlighting how rising costs are feeding through to higher consumer inflation, sending hawkish signals for monetary policy.
OECD Leading Indicators Flash Growth Warning
(…) the OECD’s gauges of future activity, based on data for July, suggests growth is set to steady in the U.S. and Japan, while slowing in Europe.
“Composite leading indicators…point to easing growth momentum in the OECD area as a whole,” the research body said.
In July, the CLI for the OECD fell further below the 100.00 mark that indicates growth is set for its long-term trend rate. The measure had been above that mark until April, and before May last fell below that level in August 2015. (…)
The OECD’s indicators suggest that slowdown may continue into 2019, although they also pointed to accelerations in China and India that could be strong enough to offset a mild deceleration in rich countries. (…)
China – Old Model Still Doing The Heavy Lifting
According to Fathom’s China Momentum Indicator (CMI), China’s growth slowed slightly in July to 6.6%, having peaked at the end of last year close to 7%. The slowdown reflects weaker growth in credit and in retail sales, with most of the other components of the CMI holding up.
This is ‘old-model’ growth: lots of heavy materials being shifted around the economy; lots of commodities being used in infrastructure investment; weak currency supporting exports; consumption squeezed through tighter credit conditions. China abandoned the ‘new model’ (rebalancing towards the consumer) at the end of 2015 after a half-hearted attempt to adopt it resulted in a sharp slowdown. Back then, the share of goods imported in China that were consumer-focused peaked at close to 18% — it is now around 15%.
Moreover, the pace of annual growth in real retail sales of consumer goods — one of the ten components of our CMI — reached a record low in July of this year, according to data published by the National Bureau of Statistics of China. To successfully rebalance China’s economy, aggregate demand needs to keep growing at or above its current rate. And, within that, the share of consumer spending in GDP needs to increase dramatically — implying that consumption growth has to run significantly ahead of GDP growth. The tactics currently being deployed by China’s policymakers will not lead to this outcome.
Doubling down on the old model brought growth back up to target, but that is a much smaller impact than the same policy had after the global recession: the old model is exhibiting diminishing marginal returns. China’s growth has peaked, and we expect real growth to slow by more than the government’s official forecasts imply. In our latest Global Economics and Markets Outlook (GEMO) for 2018 Q3 we forecast China’s economy to slow in 2019 to 5.9% and to slow sharply in 2020 to around 3.0%.
China Auto Sales Slump on Trade Tensions, Economic Jitters Vehicle sales fall 3.8% to 2.1 million in August, the second straight monthly decline
Vehicle sales fell 3.8% to 2.1 million last month, the government-backed China Association of Automobile Manufacturers said on Tuesday. That followed a 4% drop in July.
(…) vehicle sales grew 5.6% in the first six months of 2018. (…)
Sales of electric-vehicles—which account for about 2% of the auto market—remained a bright spot, increasing by 50% year-over-year to 101,000 last month as the Chinese government continues to promote EV-friendly policies, including subsidies. EV sales were up 88% to 601,000 in the first eight months of the year.
Borrowers Struggle to Raise Funds as Emerging Markets Tumble
(…) Emerging-market companies raised $28 billion in bonds outside their home market, mainly in dollars, this summer, a fall of more than 60% from last year, according to data-provider Dealogic. Governments raised $21.2 billion, a decline of more than 40%. (…)
The concern is that a falloff in credit growth will impact economic growth while making it more difficult to pay off outstanding debt. Asian companies, for instance, have $38 billion worth of publicly issued dollar-denominated debt coming due this year, according to Dealogic. (…)
In bond markets, yields on hard-currency emerging-market debt have risen from 4.5% to 6% this year, according to the Bloomberg Barclays EM USD Aggregate index, which includes dollar-denominated sovereign, quasi-sovereign and corporate bonds. (…)
Charles Robertson, global chief economist at investment bank Renaissance Capital, said emerging-market companies are more exposed to the international bond market than they were during the financial crisis, when risk appetite also dried up and emerging markets struggled to raise cash.
That is because banks in developed economies have scaled back syndicated-loan operations outside their home markets, forcing some firms in poorer countries to turn to public bonds instead. (…)
Is Indonesia the Next Emerging-Market Domino to Fall? Indonesia is no Turkey or Argentina. That doesn’t mean bottom-fishing is a good idea, juicy government debt yields aside.
(…) Indonesia is no Turkey or Argentina, but investors are right to be concerned. Juicy bond yields notwithstanding, spelunking in Indonesia’s coal mines while broader emerging markets are filling up with water looks a risky business.
Maybe no Turkey but aspiring. Here’s a chart from A. Gary Shilling:
European Aggregate Estimates and Revisions (Thomson Reuters IBES)
- Second quarter earnings are expected to increase 9.7% from Q2 2017. Excluding the Energy sector, earnings are expected to increase 5.6%.
- In aggregate, companies are reporting earnings that are 3.1% above estimates, which is below the 4% longterm
(since 2011) average surprise factor. - Second quarter revenue is expected to increase 2.8% from Q2 2017. Excluding the Energy sector, revenues are expected to decrease 0.6%.
- 285 companies in the STOXX 600 have reported earnings to date for Q2 2018. Of these, 49.5% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
- 321 companies in the STOXX 600 have reported revenue to date for Q2 2018. Of these, 61.1% reported revenue exceeding analyst estimates. In a typical quarter 54% beat analyst revenue estimates.
China to Join Russian Drills in Sign of Growing Military Ties