Every single investment bank, Hedge Fund, large cap or Multinational Corporation hires analysts and spends time and money for the sake of having an understandable image and forecast for the future.
Having an idea of where we are in the business cycle and where we are heading towards is a crucial step for decision-making.
On which phase of the economic cycle we do stand right now, what is the next step, is it up or down, is it a recovery, expansion or a decline, how the second quarter GDP data will look like and what about the third Quarter 2021.
In this article, we try to answer some of those questions, through looking at major economic activity components, indicators and surveys.
Growth outlook though Leading economic surveys
Purchasing managers index tend to have a strong predictive power and it is highly correlated to GDP with 4 to 6 months lead.
The ISM manufacturing and non-manufacturing PMIs are signaling continuous expansion of the business activity, although the manufacturing PMI starts retracing back from march-21 64.7 peak, but it still indicate expansion above 50.
Digging a bit deeper into the ism manufacturing PMI indicator components we notice a kind of stagnation at a high level since Q-4 2020, forming a range and in recent months most of those indicators are playing at the bottom of that range, this means stable continuous improvement in the economic activity but at a slower pace than what was seen in the first half of this year. hence lower GDP annual growth rate for the third quarter.
U.S. CONSUMER CONFIDENCE
personal consumption by U.S households represents about 70% of the U.S GDP.
vaccine rollout, stimulus checks, and recent easing in restrictive measures help ease U.S citizens concerns.
the University of Michigan Consumer Sentiment Index -UMCSI is progressing in an upward trend since april-2020 bottom, but it is still far bellow pre-pandemic levels. however, the upward slope in UMCSI 3 months moving average indicates continuous improvement in U.S households sentiment and consumption.
Growth outlook though high frequency data
Based on data available at a daily or weekly frequency, The New York FED Weekly Economic Index provides a signal of the state of the U.S. economy .
The Weekly Economic Index is an index of ten indicators of real economic activity, scaled to align with the four-quarter GDP growth rate. It represents the common component of series covering consumer behavior, the labor market, and production.
the New York FED WEI INDEX is a good tracker of the US economic activity. As we see in the chart above, the index forecasts annual GDP growth at around 10% in the second quarter 2021.
Since mid April 2021 the index seems to reach its climax and starts retracing back slowly as the base effect of previous year decline began to fade. This indicates some momentum slow-down and lower Q-3 GDP growth rate on a year over Year basis.
the Base Effect : a major headwind against uninterrupted Growth uptrend
in this chapter we look at Major economic hard data from a base effect perspective. As the most common measure of economic growth is the percentage change from the same period one year ago, the calculation could be widely affected by the indicator move in the base year.
The chart above shows the U.S Real GDP annual Growth rate, the yellow line shows that the base effect will push GDP Growth by 9% in Q2, while the effect would be only 2.8% in third Quarter.
This implies that Growth rate should retrace back to normal levels in third Quarter after overshooting too much high in the second quarter to expected levels unseen since post second world war (1950-1951).
the base effect theme is a common feature among all economic hard data, as it begins to fade after peaking in April 2021, some retracement in the growth speed is more likely to take place among most economic indicators