Global Trade - Big Historical Revisions To GDP
Global Trade ending up falling for the third straight quarter in a row. Q2 advanced GDP report like all advanced GDP readings was anticlimactic. Mostly because the results might not be close to the final readings.
This is our best guess at GDP growth, rather than what actually it was. It’s very likely headline growth fell, and the consumer was strong. But we don’t know much other than that.
Quarterly non-defense federal spending growth was the 2ndhighest in 30 years. That can easily be revised lower. That would push headline GDP growth closer to its expected rate.
Revisions are a catch 22
Global Trade - Especially in the sense that they are very likely to be the final reading, but they are from a while ago. Investors are focused on the future, not the past. Yes, it’s good to look at recent results to extrapolate the future. But how valuable are results from 1-2 years ago?
This time the revisions definitely matter. The chart below shows the revised yearly GDP growth readings going back to 2014. This revision changes a lot. The entire trend looks different.
Growth was revised higher in 2017 and the first half of 2018, but lower in recent quarters. Q1 went from being the highest yearly growth in a few years to being a small blip higher in a multi-quarter downtrend which was extended in Q2. T
his is the slowdown economists have been talking about for about a year. It’s finally in the data. However, Q2 real final sales growth was strong on a quarterly basis. I’m not ready to call for a recession in 2020 yet.
This new trend in yearly GDP growth follows the ECRI monthly coincident index’s growth downtrend. ECRI growth is still about 0.6% above its trough in 2016. But growth is headed in the wrong direction.
Investors expect GDP growth to be weak in Q3 as well. But most estimates show improved growth in Q3. That’s on a quarterly basis.
Global Trade - New Uptrend In ECRI Leading Index’s Growth Rate
There is a new downtrend in yearly GDP growth and a new uptrend in the ECRI leading index’s yearly growth. This improvement from -0.7% growth to no growth isn’t just because of easier comps.
The index improved from 145.9 to 146.3. Yearly growth rate is getting back near the high of the year. Meaning, economic growth in the beginning of 2020 will be near the long term trend. This index’s growth rate is showing improvement while the leading indicators index is seeing growth decline.
However, the leading index in June had positive growth. I’m looking for a turnaround in global growth to the upside. But I haven’t seen one in the data. Improved global growth would push U.S. growth higher. At least the decline hasn’t led to an American recession.
3rd Straight Decline In Global Trade
Global Trade - As you can see from the chart below, Q2 yearly growth in global trade volumes was about -2%. It was negative for the 3rd straight quarter which is a much longer streak than the weakness in the last slowdown from 2015 to 2016.
Worst reading in this slowdown was Q4 2018. Undoubtedly, if there is a trade deal, growth will improve. I expect a trade deal by the end of this year which means growth should turn up in Q1 2020.
Some might subsequently state the potential global growth improvement is solely related to the trade deal. But obviously there are other factors such as the monetary stimulus.
Flash global manufacturing JP Morgan PMI was weak in July. Headline PMI fell from 49.4 to 48.9 and output index fell from 49.5 to 49.3. Future output index has had the biggest decline in the past few months. It went from 59.9 in April to 56.7 in July.
With a trade war and cyclical slowdown in place, there is little reason to be optimistic. As investors, we need to look at upside risk while everyone is looking at downside risk. New orders and export orders indexes also fell and are in contractionary territory. They went from 49 and 48.8 to 48.6 and 47.9.
Global Trade - Big Revision To The Savings Rate
Just like yearly GDP growth, the personal savings rate had a large revision in the recent data. Very large revisions to old savings rate data isn’t unusual because the savings rate is a plug. The percentage is the result of other calculations.
As you can see from the chart below, the post-revision savings rate is much higher than the original reports. Change came from revisions to compensation and net interest.
Savings rate is now 8.1%. It is relatively high and supports the narrative that consumers have deleveraged this cycle. To be clear, the issue of millennials having a tough time moving out of their parents’ house and buying their own wasn’t resolved by this shift in past data.
It just means there is plenty of runway for economic growth to continue. This expansion isn’t near its expiration date. There isn’t a consumer debt bubble.
Solid Earnings Season
Global Trade - As a result of the earnings reports so far, The Earnings Scout has blended Q2 earnings growth coming in at 0.41%. This data firmly goes against any description of an earnings recession.
True testament of the strength of an earnings season is the change in the subsequent quarter’s earnings growth expectations. Q3 estimates and Q4 estimates have fallen modestly since the start of the month. On July 1st, Q3 growth was expected to be 1.68% and now it’s expected to be 0.38%.
For the 3rd straight quarter, estimates may fall to the negatives. Q4 EPS growth was expected to be 8.62% on July 1st and now it’s expected to be 7.65%.
As you can see from the table below, Q3 estimates have fallen 0.97% for firms that have reported results. Q1 estimates fell 3.31% and Q2 estimates fell 1.93%, so we are headed in the right direction.
Communications services sector has had the best quarter by most accounts. As you can see, its Q3 estimates have increased 1.13%. Worst was energy which had its estimates fall 3.72%. Healthcare had the 3rd best change in Q3 estimates, but is having the worst year to date performance.
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