This Week’s Key Observations
Lead indicators point to no growth in the US… The Conference Board Lead Indicator is now up just 0.7% year on year, yet excluding the artificially distortive influence of yield curves, it is already in decline. So too is the Duncan Lead Indicator, which compares the consistently cyclical components of the economy in relation to overall real economic growth. It declined for the third straight quarter, which has historically been an indicator of a US recession. One of the few times when the DLI has declined for three consecutive quarters without a subsequent recession was 1986, when the US saw a similar drag from declining investment. Our economists see fading headwinds from energy and the dollar as likely to mean the US economy will avoid a recession, like in 1986, but these indicators do appear consistent with their heightened 40% recession probability.
UK consumers are very bearish on the economy, but less so on their own financial situation. Based on GFK data, UK consumer confidence saw the biggest ever monthly decline in July, falling to the lowest level in almost three years. However, the survey showed a wide gap between consumers’ opinions on the likely state of the economy of the coming 12 months, where expectations fell to the lowest level in over four years, and confidence in their own personal financial situation, which only fell to neutral levels.
Our economists’ Eurozone Consumer Spending Indicator points to a further slowdown in 3Q. Eurozone retail sales remained steady in June, up 1.6% versus last year, with monthly declines in both Germany and France offset by strength in Spain. While eurozone macro data have generally surprised on the upside in recent weeks, there are some warning signs of a less robust growth environment in the second half of the year. Consumer confidence declined in July for the second consecutive month, albeit remaining 0.6 standard deviations above the long-term average, and our economists’ Eurozone Consumer Spending Indicator points to a further slowdown in consumer spending in 3Q.
Cyclicals earnings revisions have fallen to their lowest levels relative to Defensives since 2009. Europe’s earnings season has delivered reasonably healthy 2Q results, with 10% more companies beating expectations than missing. In part because of decent results, earnings revisions haven’t, in aggregate, declined significantly post the UK referendum. However, European earnings revisions have been supported by Defensives and Commodities, where revisions remain positive, but dragged lower by both Financials and Cyclicals, where revisions remain deeply negative. The gap between Cyclicals and Defensives earnings revisions ratio has now fallen to its lowest level since 2009.