Spotting Changes in the Global Economy

One of the first places to spot changes in the global economy is in the economic surprises index.

The best-known economic surprises index is prepared by Citigroup. The index doesn’t track whether economic data is positive or negative, improving or declining. Instead, it tracks whether the data is better or worse than the expectations of economists and analysts.

A positive surprise occurs when a data report is better than the consensus expectations; a negative surprise occurs when data is worse than expectations. The economic surprises index tracks whether the economy is doing better or worse than expected. An advantage of the index is that it tracks all the major economic data releases. One or two reports aren’t going to move the index.

It is possible to read too much into the index. If economic growth is strong but not as strong as the forecasts, the surprises index will be negative. You could interpret that as meaning that the economy is turning down. But it also could mean that the economy’s strong, but economists are too optimistic.

The surprises index can be more helpful in making investment decisions. If the index is turning down, it’s likely that the excessively positive expectations of the economic forecasts are built into stock prices. Stock prices could decline even if the economy continues to grow.

With that review, let’s look at the recent data.

In the United States, the economic surprises index climbed sharply in late 2017, dipped a little in January and stayed in a narrow range for a couple of months. It turned down in the last few weeks but stayed in its recent range. Unless the data take a sudden tumble, that indicates U.S. growth slowed a bit but still is positive and remains higher than earlier in the economic recovery.

The results are very different in the rest of the world.

Europe’s surprises index has been declining sharply all year and now is well into negative territory. Much of Europe’s data is positive and the continent is not in a recession. But economists have been expecting better. The data isn’t as strong as in 2017.

Japan is doing a little better. Its surprises index is in negative territory, but not as far as Europe’s index. Japan’s data generally is improving, but not enough to meet the strong expectations generated in 2017. The country continues to have trouble establishing steady growth.

Emerging markets generally are doing well. Their aggregate surprises index is well into positive territory. It is less positive than a few weeks ago, when it reached one of the high points of the economic recovery.

When all these indexes are put together, the global index is right around the neutral level. But the index has been declining recently, and a few more data releases that are worse than expectations could make it negative.

The conclusion is that the recent tightening by the Federal Reserve and other central banks appears to be having an effect. Growth still is positive, but growth rates are falling across the globe. The United States continues to fare the best, though recent growth probably is slower than the highs of 2017. In other regions, growth wasn’t as strong and is declining more rapidly. I still don’t see signs of a recession in my early warning indicators, but the recent trends in the economic surprises indexes mean we should follow the data closely.

The Data

Small business owners are a bit less positive than last month, according to the NFIB Small Business Optimism Index. Last month, the index’s reading of 107.6 was just short of the 45-year high of 108.0 recorded in July 1983. The March reading came in at 104.7, as compared to 107.6. The reading still is in the top 5% historically, though it is the lowest since last October. Almost all categories of the index declined during the month, and business owners continue to report that their biggest problem is filling jobs with qualified workers.

The inflation reports were a mixed bag this week.

The Producer Price Index rose 0.3% for the month and now is up 3.0% over 12 months. After excluding food and energy, it also rose 0.3% for the month and was up 2.7% over 12 months.

The Consumer Price Index was more complicated. The headline number declined 0.1% for the month, giving a 2.4% increase over 12 months. But a decline in gas prices, which has largely been reversed, was a major reason for the negative reading. After excluding food and energy, the index rose 0.2% for the month and 2.1% over 12 months.

The reports show a continuation of the slow, uneven rise in inflation we’ve experienced the last couple of years. The details in the reports indicate we can expect continued pressure for higher prices in coming months, though the pressures won’t be strong enough for the Fed to accelerate its tightening schedule.

Last week’s Employment Situation reports were interesting. The headline number was a disappointment, with only 103,000 new jobs created. That was well below expectations and the results of recent months. But job growth over the last few months has been very strong, and this data often has substantial revisions in the following months.

Also, weather might have been a substantial factor. Most of the shortfall came in construction and other sectors that are affected by the weather. Mild winter weather in previous months followed by unusually harsh March weather in much of the country could explain a lot of the missing jobs.

Wage growth continued its recent moderate growth rate.

New unemployment claims declined 9,000, following the sharp 24,000 increase last week. The four-week average now is 10,000 claims higher than a month ago.

Consumer use of credit cards barely increased in February, which explains a lot of the recent softness in retail sales. Consumers have been reducing spending after a surge in late 2017.

The Markets

The S&P 500 eked out a 0.08% gain for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.24%. The Russell 2000 returned 1.02%. The All-Country World Index increased 0.66%. Emerging market equities added 0.35%.

Long-term treasuries increased 0.68% for the week. Investment-grade bonds gained 0.48%. Treasury Inflation-Protected Securities (TIPS) returned 0.35%, while high-yield bonds rose 0.63%.

On the currency front, the dollar fell 0.59%.

Energy-based commodities rose 3.96% for the week. Broader-based commodities returned 3.15% and gold gained 1.25%.

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