It would appear that the dilemma of the world exporting more than it imports (that we initially pointed out here [7]) is starting to come to a head in reality with a negative export trade shock. As Gluskin Sheff's David Rosenberg notes, since the recovery began three years ago, over 70% of the real GDP growth we have seen was concentrated in export volumes and inventory investment; and recent data from the ISM (here [8] and here [9]) points to a dramatic slowdown in both. Compounding this weakness is the fact that the remaining growth was from Capex - which is now likely to slow given the weakening trend in corporate profits - and will more than offset any nascent turnaround in the housing sector - if that is to be believed. The consumer has all but stalled and adding up all these effects and there is a high probability of a 0% GDP growth print as early as Q4.
Macro Risks Squarely To The Downside
I think that there may be a time, before too long, when we will walk into the office to find that the US prints a negative GDP reading on the back of a negative export trade shock that does not appear to be in any forecast - let alone consensus.
[10]
Look at the pattern of ISM export orders:
- April: 59.0
- May: 53.5
- June: 47.5
- July: 46.5
That is called a pattern. And this is a level that coincided with the prior two recession. As the chart below vividly illustrates, there is a significant 81% correlation between annual growth in total US exports and the ISM new orders index (with a four month lag). So either the market has already priced this in or it is going to end up coming as a very big surprise. We are already seeing the lagged effects of the spreading and deepening European recession hit Asian trade-flows: Korean exports sagged 4.1% in July after a 3.7% slide in June and are down 9% on a YoY basis. Industrial production there edged lower by 0.4% as well last month - I like to look at Korea since it is a real global 'play' on the economic cycle.
[11]
There is likely going to be another surprise, which is inventory destocking. How do I know that? Because the share of ISM industries polled in July reported that customer inventories were excessively high soared to 33% in July from 11% a year ago (because this metric is not seasonally adjusted it can only be assessed year-on-year), the highest ever for any July in the historical database.
Add to that what is happening to order books - the share of the manufacturers reporting expanded orders sank to 17% in July from 50% a year ago and again - the worst July showing on record.
The food price situation is another major wild card, especially since whatever relief we enjoyed from lower gasoline prices is now behind us. At a 14% share of the consumer spending pie, only shelter is more important than food. And when you go back to the last food cost surge, in the first quarter of 2011 when the grocery bill soared at a punishing 10% annual rate, real GDP growth slowed to a 0.0% annual rate that quarter, which arguably was the big surprise of the year (up until the dent downgrade, that is).
In the final analysis, since the 'recovery' began three years ago, over 70% of real GDP growth we have seen was concentrated in these two areas: export volumes and inventory investment. The rest was in capex which is now likely to slow along with the weakening trend in corporate profits, more than offsetting the nascent turnaround in the housing sector. Also keep in mind that the consumer has stalled.
Tally all these effects up and you are looking at the prospects of 0% growth as early as Q4.