With this morning’s release of the April Chicago Business Barometer report, all of the regional growth indications are in for the month. In aggregate, the message appears somewhat mixed, but overall consistent with the chorus of recent data such as last month’s big miss in private payrolls, the disappointing existing home sales number for March, below consensus durable goods orders, the subpar Q1 GDP report and escalating initial jobless claims: the domestic economy is still expanding, but growth is slowing.
It was announced today that the April Chicago Business Barometer declined from 62.2 to 56.2, marking the second consecutive month of slippage. This measure currently rests at a 29 month low. However, as the reading is still well above 50, area business activity continues to expand, as has been the case since October 2009.
On April 24th, the Richmond Fed Fifth District Survey of Manufacturing Activity suggested that manufacturing in the central-Atlantic region accelerated versus March. An increase in shipments played a large part in pushing the headline figure higher, but employment also improved over the previous period.
The Business Outlook Survey from the Philly Fed was released three days prior to the Richmond Fed survey. Indices for general activity, new orders and shipments all declined modestly, while the current employment series improved meaningfully. Overall, the diffusion index of current activity, the broadest measure of manufacturing conditions, fell from 12.5 to 8.5.
The final member of the quartet of regional macroeconomic growth indicators that I follow (and the first to publish its report each month) is the Empire Sate Manufacturing Survey, by the New York Fed. During the month of April, the general business conditions index fell by fourteen points to 6.6, suggesting a moderation in the pace of growth. Nonetheless, the still-positive April reading implies modest expansion in the level of New York-area manufacturing output. Notably, the ‘number of employees’ sub-index hit its highest point in almost the last year.
Interestingly, forward outlooks indexes managed to hold their ground better than general conditions measures, evidencing consistent optimism among manufacturers.
In a piece titled, Downunder Daily: Cycle Drives Post-Bubble, Morgan Stanley’s Global Equity Strategist, Gerard Minack, argued (rather persuasively) that in post bubble environments, macroeconomic growth—above the monetary cycle and micro factors—tends to drive equity returns. He cites the plight of Japan since 1990 as well as the U.S. during the 1966-1982 secular bear market as examples.
The chart below shows the S&P 500 Index in the upper pane and an equally-weighted composite of the four regional manufacturing surveys referenced above (the black dotted line in the bottom pane represents the three-month moving average for the growth composite; the red and green curves represent 20/2 Bollinger Band measures of the cheapness / expensiveness of growth). Given that inflections in the equity price index have been (more or less) consistent with turns in the growth index, the graph appears to support Minack’s thesis. Accordingly, tracking growth looks to be a worthwhile endeavor in the present regime.
Aside from the coincidence of inflections in the S&P and the growth index though, there are a couple of other worthwhile observations to be gleaned from the chart. For one, while still expanding in aggregate, domestic growth is slowing (the composite has declined for the past two months, and even the slower-responding moving average series has began to decrease).
Also of note, negative divergences between stock prices and growth (which were formed as price made new highs while growth lagged) hint that a correction in price is likely in store. This is consistent with my thesis that an intermediate-term correction is needed before equities can mount their next multi-month advance. The timing of the divergence signal is highly uncertain however, and should not be used as a stand-alone trading trigger (there are indeed other, better timing measures that corroborate the idea that the market is either already extended on an intermediate-term basis, or is rapidly closing in on that dubious distinction). Note, for instance, that by the 2008 peak similar divergences had persisted for four years.
In closing, the ISM Manufacturing Report on Business will be released tomorrow morning. Given the advance indications from regional data, I would not be surprised to see a modest slide in the headline figure to below March’s 53.4 reading. However, I expect that the 50 threshold, which separates economic expansion from contraction, will not be compromised.