Slowdown or Recession?

Economic data so far is showing nothing worse than a modest slowdown in global growth but markets are acting as though a recession is on the horizon. Both cannot be right. Here are three spots to watch for early signs and a chart from Ashraf indicating how the Fed's policy mistake could occur this time around.

China data

Everyone has been worried about China for nearly 15 years. The growth has been unlike anything seen in history and the smooth pace is one of those things that's felt too-good-to-be-true for a long time. Could this finally be the first real test?

One problem is that data can't be trusted. It's been manipulated forever.  Guangdong abruptly stopped publishing its economic survey in October after five straight months of declines. Officials said the regional industry office didn't have approval from the stats bureau.

One area that can't be faked is trade data. That's because it's reported for China and in the trade partner and the numbers need to match up. Especially watch imports as they're more forward looking than exports. In November, imports rose just 3.0% y/y compared to 20.8% in October and 14.0% expected.

Trade war data

Central bankers have been remarkably arrogant around trade risks. Yesterday Powell talked about their models around trade and that the impacts weren't big but that it could damage sentiment. Poloz has been saying the same.

I don't believe you can model it and historical evidence is hard to come by. We just don't know businesses and the real economy are going to react. The key variable is stockpiling. Trump has been talking about tariffs all year and that may have led to a hidden buildup in inventories. As tariffs hit in September, we might see an inventory drawdown, which could curb growth. At the same time, you have Trump threatening 25% tariffs on everything so – as a business – you're continuing to accumulate and stockpile. Eventually though, you hit the cliff.

Signs of trouble will be in trade data and manufacturing surveys. Yesterday's release of the Philly Fed dropped to the lowest since 2016. The NY Fed's Empire index is at the lowest since March 2017

Capex data

Business investment is a leading indicator. Unfortunately core US durable goods orders have been negative for the past four months. Look out for commentary from corporate leaders. Earlier this week, Fedex warned about slowing global growth, particularly in Europe. More comments along those lines would severely undercut sentiment. The risk is that companies use it as a scapegoat for poor execution.