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A chart courtesy of JP Morgan Asset Management on Monday:
That’s the Citigroup Surprise Economic Indicators Index, calculated daily to reflect how economic indicators have performed against consensus expectations during the prior three months.
JPM notes that the eight-year-old index for US indicators recently touched its record high but has now started to decline, and interprets this to mean either that “the actual macro data have deteriorated, or that expectations have risen sharply with the result that the outturns have disappointed.”
Here’s a closer look at the US index for the last year:
The inflection point in the late summer, as the recovery picked up, is clear — as is the recent falloff.
JPM adds some commentary…
At present, there are no conclusive signals to confirm that the US or global economies are topping out. However, there are some early warning signs with last week's US jobless claims, trade data and Michigan sentiment releases all much worse than expected. The impact of weaker retail sales data together with a much larger trade deficit could be that H1 growth in the US economy will be slower.
… before cautiously concluding that asset markets will remain highly sensitive to macro data in the coming months, as investors had priced in a stronger 2011 than we may end up with if these warning signs are accurate. PragCap recently found that even after stripping away the crisis years, a peak in the index normally leads US equities sideways or lower.
Still, we would caution against reading too much into this latest change in the index. Consensus expectations normally have a strong status quo bias, so you would expect to see a big spike in the series during the early months of an accelerating recovery. And there have been bigger dips in the index even during the last six months, before it started climbing again.
That said, it shouldn’t be ignored so let’s take a quick look at the indicators highlighted by JPM.
– We can safely ignore a single week’s initial claims figure, which is a volatile figure. The four-week average has been declining steadily in recent months.
– As for the big decline in consumer sentiment, James Hamilton points out that higher energy prices reliably lead to a pronounced drop. Hamilton adds that sentiment itself is a “noisy indicator”, but this is still very worrisome given both the severity of the drop and the leading role of consumption in pushing forward the recovery.
– The rise in the January trade deficit is also attributable largely to oil, though the news wasn’t all bad. It’s true that high oil prices pushed up the amount spent on imports, but exports also continued climbing impressively. But this figure will probably just get worse in February and, barring a sudden decline in oil, March.
– As for retail sales, they were actually not so bad even accounting for how the rise in oil prices made some items cost more. This was surprising, though we’re unsure it can last.
So as usual, the story is complicated. But given the disturbing shadow that oil prices continue to cast over a US recovery brightening until just a couple of months ago, it makes sense to worry that the big surprises going forward won’t be the kind we like.
Related links: Consumers see bad news – Econbrowser US deleveraging and consumption, in progress – FT Alphaville
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