US Economy Badly Disappoints Analysts’ Expectations by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 24, 2015
IN THIS ISSUE:
- US Economy Disappoints Analysts’ Expectations Badly
- CitiGroup’s Economic Surprise Index Ranks US Lowest
- US Most Disappointing in Developed World vs. Forecasts
- Despite Plunging Rig Count, US Oil Production Still Rising
- Oil Companies Face High-Interest Junk Bonds or Bankruptcy
- Time to Consider Niemann Capital Management
Today we will talk about an economic indicator that I have not written about before, which is compiled and reported monthly by CitiGroup, the American multinational banking and financial services corporation headquartered in Manhattan.
The report is known as the CitiGroup Economic Surprise Report. It is an interesting indicator in that it measures how actual economic reports exceed or fall short of their pre-report expectations, or “consensus” as we call it.
CitiGroup compiles the Surprise Report each month, not only for the US but also for other regions of the world, including the Eurozone, China, Asia and others. We will look at this particular indicator today since most US economic reports this year have come in below expectations, whereas in late 2014, most exceeded the consensus.
What does this tell us about the future? Most analysts conclude that the recent downward trend in the Surprise Report means that the US economy is slowing down, perhaps significantly. I tend to agree. Yet some others maintain that the report tells us little, if anything, about the direction of the economy. That’s what we will talk about today.
Following that discussion, we’ll turn our attention to the latest developments in the oil patch. Given the collapse in oil prices over the last year, the number of working oil rigs has plummeted by almost 50%. Yet very surprisingly, daily oil production and our level of above-ground crude inventory have continued to increase rapidly.
The question is, how can the rig count drop by almost half, yet daily oil production has continued to soar? The answer may surprise you. Let’s get started.
US Economy Disappoints Analysts’ Expectations Badly
Of late, there is one economic indicator that is really making the rounds: CitiGroup’s US Economic Surprise index. The Surprise Index merely looks at a variety of monthly economic reports and ranks them on the basis of whether they were better or worse than the pre-report consensus.
This index gauges how US economic data performs relative to expectations on a rolling three-month basis. A reading of 0 means that the last three months’ worth of data were on balance in-line with Wall Street estimates. The index climbs into positive territory when economic data is better than expected, and it goes negative when data disappoints.
On the surface, this would not seem to matter to most of us, but if we drill down deeper, the Surprise Index can lead us to clues as to where the economic trend is headed. So let’s start by looking at a chart.
Now let’s be clear as to what this chart shows. The Surprise Index merely shows how the various economic reports exceeded or disappointed the pre-report expectations average. It does not necessarily represent whether the overall economy is headed up or down. However, I do think this index can be useful in spotting upcoming trends, particularly when it changes direction.
Simply put, US economic reports, on balance, exceeded the pre-report consensus in the second half of last year. Then the Index plunged sharply lower beginning in January. What that means is that most of our monthly economic reports have fallen below analysts’ average pre-report expectations. This is not a good sign for our economy.
Now let’s look at another chart on the same subject. This chart shows how the US economy has faltered recently in terms of CitiGroup’s Surprise Index, which compares the US to the Eurozone, the G-10 countries, the UK, China, Japan and emerging nations. Take a look.
The US has gone from the leader in late 2014 to the laggard so far this year. That is a huge drop in less than six months. How could this happen? Again, this is just a function of how many of our economic reports have come in below the pre-report consensus.
Currently the US Economic Surprise Index is at levels not seen since 2008, when America was in the deepest recession since the Great Depression. Again, this doesn’t mean that the economy is anywhere near as bad as it was then. But whether it’s a slowdown caused by the harsh winter or something else, relative to where economists thought we would be, the US economy is missing by a large margin.
This also doesn’t mean that all sectors of the economy are disappointing. One notable exception to the disappointment is jobs. The economy added 295,000 jobs in February and 1.3 million over the last four months, a reflection of a healthier labor market in which the unemployment rate has fallen to the lowest level in almost seven years.
Most everything else, though, is disappointing. This month alone, personal income and spending, manufacturing (as measured by the Institute for Supply Management), auto sales, factory orders, and retail sales have all come in weaker than expected.
The surprise shortfall in the US doesn’t necessarily mean the world’s largest economy is in dire straits. It’s just falling short of elevated expectations which may be due to earlier optimistic forecasts for growth in 2015 that have since been revised lower. Whatever the reasons, the US has seen the most disappointing economic reports, relative to forecasts, of any of the countries tracked by CitiGroup.
Federal Reserve Chair Janet Yellen made no mention of the US economy faltering in her congressional testimony in late February. In fact, she cited an “overall improvement in the U.S. economy and the U.S. economic outlook,” boosted by lower oil prices. However, the Fed changed its tune at the latest policy meeting last week and acknowledged that “economic growth has moderated somewhat.”
The statement also indicated the Fed will not raise the Fed Funds rate until it sees “further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” [Emphasis mine.]
To read my full analysis of the Fed’s latest policy statement, go to my Blog from last Thursday.
In conclusion, it remains to be seen if the US economy is headed for another slump. But we have clearly seen a drop in retail sales over the last three consecutive months, as I pointed out last week. Nevertheless, most forecasters still believe the economy will grow by 2.5-3.0% this year, despite the fact that the US Surprise Index has disappointed more than any other country in recent months.
Despite Plunging Rig Count, US Oil Production Still Rising
Given the fact that crude oil prices plunged from above $100 per barrel to below $47 as of last week’s close, you would expect that a lot of drilling rigs would be shut down and oil production would decline, perhaps sharply. Yet US oil production continues to rise.
It’s true that many rigs are being idled. As of early March, only 866 rigs were still active