Some Observations on Recent Data Oddities

Beyond the obvious takeaway from recent economic data—that economic conditions are generally dismal, if getting less so lately—some recent releases have included interesting curiosities we think are worth noting. While none have make-or-break implications for investors, they all illustrate some of the highly unusual aspects of the economic stretch we are enduring.

The first appears in US purchasing managers’ indexes (PMIs)—surveys seeking to gauge the breadth of economic expansion or contraction, with 50 dividing the two. Thanks to a calculation quirk, IHS Markit’s May composite PMI of 37.0 was below the manufacturing and services PMIs (39.8 and 37.5, respectively) that ostensibly comprise it.^[i] The oddity—which initially appeared in May’s flash (or preliminary) PMIs—stems from the composite gauge using a subindex of manufacturing production, which has a mere 25% weighting in the headline manufacturing index. The number of firms reporting output growth in May dropped precipitously. As May’s report states, “The impact of ongoing emergency public health measures following the escalation of the COVID-19 outbreak led to a further severe decline in production across the U.S. goods-producing sector in May. … With the exception of April's recent nadir, the rate of contraction was the fastest since February 2009.”^[ii]

So, what drove up the headline reading? In the report, Markit’s economists hinted supplier delivery times were extremely long. Normally, this would be a sign of strong demand. Not so now, when it is more about interruptions to business and the supply chain. The Institute for Supply Management’s (ISM) May PMIs—which survey fewer firms but have a longer history than Markit’s—echo the point. While ISM’s headline May manufacturing gauge rose to a still-contractionary 43.1 (from April’s 41.5), the Supplier Deliveries Index registered 68.0.^[iii] Likewise, ISM’s May non-manufacturing Supplier Deliveries Index notched 67.0.^[iv] Notably, though, ISM’s manufacturing supplier deliveries index fell 8.0 points from April, while non-manufacturing supplier deliveries dropped a whopping 11.3 points.^[v] These indicate looser restrictions are helping businesses repair supply chains—a positive sign, even if it curiously detracts from headline PMI readings.

The second data peculiarity comes from the Land Down Under. A -0.3% q/q Australian GDP contraction in Q1 strongly suggests the world’s longest expansion will die of coronavirus lockdowns when Q2 GDP comes out. In our view, this highlights the fact expansions don’t die of old age.^[vi] Two concrete negatives—devastating bushfires and (later) COVID lockdowns—drove the Q1 dip. Private consumption fell -1.1% q/q, while private fixed capital formation declined -0.8%.^[vii] Imports, meanwhile, contracted -6.2% q/q, the largest drop since Q1 2009—an indication of weak domestic demand.^[viii] Given global COVID-related restrictions persisted throughout April and May, a steeper contraction likely awaits in Q2. Using the common definition of a recession as two consecutive quarters of GDP contraction, this would officially end Australia’s expansion.

Recessions recur regularly, but they aren’t inevitable—nor do they become more likely as time passes. Typically, they stem either from the correction of gradually accumulated economic excesses—like overinvestment and/or too much credit—or sudden, big negative shocks, like this time. Government policy, national economic strengths or weaknesses and plain luck can also influence their frequency. For example, Australia weathered the 2007 – 2009 global recession thanks largely to its status as a source of raw materials for China’s infrastructure spending blitz. So whenever the next expansion begins—which may be close by, considering economic reopenings are underway—we think investors will benefit from assessing whether its drivers are intact, not how old it is.

The final interesting data tidbit: US consumer spending’s record April plunge, ironically, undercuts one major argument among recovery naysayers—that consumers won’t be able to buy. US personal income leapt by a record 10.5% m/m in April, thanks entirely to government cash infusions.^[ix] “Personal current transfer receipts,” which include unemployment insurance and the CARES Act payments, nearly doubled from March levels.^[x] Meanwhile, personal consumption expenditures fell -13.6% m/m in April.^[xi] Hence, personal saving as a percentage of disposable income surged to 33.0% in April from 12.7% in March.^[xii] While April’s consumer spending figures are obviously bad—and likely heavily influence Q2 GDP—this suggests consumers have dry powder on hand to deploy when businesses reopen more broadly. While no one can know for sure, we think this likely helps consumer spending return to its usually pretty stable trajectory.

While all these data hold lessons for investors, keep in mind they are backward-looking and don’t reveal where economies or markets head from here. In our view, that primarily hinges on how fast economies reopen and how the accompanying economic recovery compares to expectations. This could change, but presently, we think gradual reopenings plus entrenched pessimism are a recipe for rising stocks.