Goldman's Analyst Index Points To A Bleak September

As the rapacious rally of this afternoon glides into a sulky sell-off, Goldman's global economics team provide a little more kindling on top of further Kiwi downgrades to help us on our way. The Goldman Sachs Analyst Index (GSAI) fell below the 50 mark (signifying more analysts see contraction in their sectors than expansion) for the first time since AUG09. Combine that with the new orders index registering the largest decline in the index's history (plummeting 22.5pts to 28.6) and the subdued growth outlook remains firmly in place.


From Goldman Sachs' Research: US Daily: GSAI: A Bleak September


  • The Goldman Sachs Analyst Index (GSAI) fell below the 50 mark for the first time since August 2009, dropping 8.3 points to 43.3 in September.
  • The new orders index registered the largest decline in the history of the GSAI, plummeting 22.5 points to 28.6.
  • A sharp downswing in the orders vs. inventories gap, weak reports for all other component indexes, and analyst commentaries further point to a subdued growth outlook. Inflation risks remain low as price indexes dropped.

The GSAI fell 8.3 points from 51.6 in August to 43.3 in September. This is the first sub-50 reading for the headline index since August 2009, and the lowest reading since June 2009 (a dip below the 50 mark implies that more analysts see contraction in their sectors than expansion). The largest drag came from the new orders index, which plummeted 22.5 points, dropping to 28.6 from 51.1 in August. All other components except for the inventories index also fell from the previous month. (As a reminder, we construct the headline GSAI using the following weights: 30% for new orders, 25% for sales/shipments, 20% for employment, 15% for materials prices, and 10% for inventories. These weights parallel the Institute for Supply Management’s pre-2008 practice, substituting our materials prices index for their supplier deliveries index. The GSAI includes service as well as manufacturing industries.)


The biggest decline this month came in the orders index. It plummeted 22.5 points—the largest month-on-month drop in the orders index in the history of the GSAI—to 28.6 from 51.1 in August. The level of the orders index is the lowest since March 2009, and the drop contributed 6.75 points to the decline in the headline. The shipments index fell slightly by 0.7 points and stayed below the 50 mark at 43.5; its 3-month moving average also fell for the sixth consecutive month and now dips below the 50 mark at 49.9. Overall, the headline and leading components point to further weakening of the economic environment and echo the stable but weak survey reports in September (e.g. the Richmond, Dallas, Philadelphia, and New York Fed surveys and the Conference Board’s consumer confidence report).


Changes in other component indexes as well as comments from our analysts are no more encouraging. The inventories index registered the lone gain, rising 12.5 points from 42 in August to 54.5. Coupled with the historical drop in the orders index, the orders vs. inventories gap swung sharply from +9.1 in August to -25.9. This reflects a widening gap between production and demand which will likely result in further production cutbacks going forward. The employment index dropped 8.4 points from 59.2 to 50.8, ending consecutive gains over the last three months. This decline is in line with recent drops in the Richmond and Philadelphia Fed surveys and suggests a weak but seemingly stabilizing labor market. Qualitative comments from some of our analysts (e.g. Semiconductors) further indicate weak activity, while most industries expect subdued activity going forward as high market volatility and the European crisis continue to weigh on the broader economy.


On the inflation front, all three price indexes fell. The material prices index dropped for the third straight month from 61.1 in August to 54.5; the output prices index dropped 9.7 points from 72.2 to 62.5; and the index for wage and labor dropped 9.8 points from 65 to 54.2. Falling energy prices helped contribute to broad declines, and overall the indexes continue to point to low inflation risks.


As usual, we provide a detailed table of the GSAI, along with commentary from our analysts.





Engineering & Construction:


Progress of final investment decisions on potential prospects could be impacted should European credit conditions worsen.


Financial Services:


Issuance and transaction volumes are well off pace given market volatility. Profitability is getting squeezed for service companies that depend on volumes.




Stock market volatility is beginning to impact housing fundamentals. In particular, purchase-only mortgage applications have declined in six of the last nine weeks. On a brighter note, prices are currently stable, banks have not tightened lending standards anew, and the supply of homes has been moderate as financial institutions slowly work through foreclosures.




Capital investment continues, although regulatory uncertainty is weighing on certain large projects.


Retail Broadlines:


Most retailers continue to cite a bifurcated recovery in consumer spending. In particular, spending from high-income consumers has been recovering, while mid- to low-income consumers have yet to participate.




We have had a total of 16 companies in our sector already negatively pre-announce Q3 results, mostly citing weaker demand and inventory correction, and primarily in the industrial and automotive end markets. PCs and consumer electronics remain weak as well.




The cost of debt has increased, making it slightly more expensive to finance merchant power plant development. For independent power producer (IPP) and diversified utilities, natural gas prices have shown a decrease during the last few weeks that will likely lead to modestly lower profit for the companies’ unhedged portion of generation.


Hardly the recipe for a risk-on rally into September, especially as exogenous factors contonue to weigh extremely heavily on risk appetites (or at the very least should factor significantly), no matter how cheap 'valuations' or 'credit spreads' appear to be.