Global macro data is tilting the wrong way

It’s only Wednesday, but most of this week’s incoming macro data, both hard and soft, is heading in the wrong way.

Crumbling Empire State

The Empire State Manufacturing Index, reflecting the general business conditions in New York state, fell to -31.8 in May. That is the lowest level since May 2020 when Covid hit. Last month, the regional PMIs (Chicago, Dallas, Kansas, New York, Philadelphia, Richmond) signaled a slight uptick in the ISM Manufacturing Index. The sole reason for this was the unexpected spike in the Empire State Manufacturing Index. However, this has now (more than) reversed.

The chart reveals that the latest Empire State Manufacturing Index points to an ISM Manufacturing Index of 42.5, a clear recessionary level. As you will know, the ISM Manufacturing Index is a crucial macro indicator within our Macro, Sentiment, and Valuation investment framework. It represents an important bellwether for many asset classes and our Global Multi-Asset Portfolios.

For example, stock markets tend to underperform when the ISM Manufacturing falls. As the chart above shows, the average 3-month future return on the S&P 500 Index has been a meager 0.3% when the ISM was between 40 and 50 and falling. US equities declined on average 13%(!) when the ISM was below 40 and declined further.

Two things to keep in mind. First, as you can tell, the Empire Manufacturing Survey is notoriously volatile. Second, forward-looking subindices of the Empire State Index came in less ugly but, unfortunately, from already depressed levels.

US Retail Sales – Mixed at best

Excluding the volatile components Auto and Gas, US retail sales grew 0.6% in April, beating expectations. However, the March number was revised down to -0.5% from -0.3%. Overall retail sales rose by 0.4% in April, half of the expected growth.

The chart below shows annual nominal and real retail sales growth based on the headline CPI index. Both growth rates are trending down and, in the case of real retail sales, have come in negative in the last three months. While the New York Fed estimates there is still USD 500 billion in excess savings available, this likely is concentrated in high-income families, which will not necessarily spend these savings.

In addition, based on the last three months, nominal retail sales are down 3.7% on an annualized basis.

China – Growing at less than half power

Less than half of the economy drives China’s ‘reopening recovery.’ Consumer spending has accelerated mostly in line with expectations and driven by Covid-related excess savings.

However, consumer spending represents roughly 40% of GDP, a share significantly lower than that of the United States, for example. The other key areas of the Chinese economy, production, and real estate, reveal lackluster growth or no growth at all. Industrial production rose 5.6% from a year ago in April, well short of the 10.9% growth expected.

Chinese property investment was down 6.2%, worse than expected. Annual property investment has been negative for 12 consecutive months.

Finally, with new loans and aggregate financing underwhelming in April, there are few signs that the already muted Chinese Credit Impulse will improve soon.