“It Fell Off A Cliff”: Morgan Stanley's Macro Indicator Just Crashed The Most Since Dec. 2008
Step aside Citi US Economic Surprise Index, which after a “surprising” streak of negative economic data, recently crashed to the lowest level since October 2016…
… and make way for Morgan Stanley’s ARIA, a monthly US macro indicator based on data collected through primary research on key US sectors (consumer, autos, housing, employment, and business investment).
The reason why this particular index will likely feature prominently in financial commentary in the coming days and weeks, is that as Morgan Stanley’s chief economist Ellen Zentner writes, “ARIA appears to have fallen off a cliff in April, with a 0.72% decline, the largest since December 2008.”
As Zentner expains, weakness was led by sharp declines in the investment and housing components, although even as the bank’s data on business and residential investment was weaker, the consumer, employment, and autos components posted modest to moderate gains in April.
What was the main driver for the collapse: “Business formations were this month’s biggest drag, as they looked to have reversed an earlier post-election surge. If not for that, ARIA would have come in slightly positive in April at +0.13%.”
Some more observations from MS:
ARIA’s investment component made the largest negative contribution to ARIA in April (Exhibit 4), as our business formations tracker (MSBIZ) fell 11%M, the largest one-month decline in the history of our index, after a 0.2%M increase in March and a 12.7%M increase in February. The weaker trend in business formations in our data this month appears out-of-sync with small business sentiment (Exhibit 2), and suggests that small business sentiment may be set for a correction.
Still, the bank concedes that this is a sizeable miss compared with what its current quarter growth tracking suggests, with the discprenacy shown in the chart below. In fact, if the ARIA is accurate, Q2 GDP will likely print in the sub-1% range.
Earlier on Sunday, Morgan Stanley’s co-head of economics noted this collapse and warned that “if US growth failed to gain momentum in 2Q, this would likely rattle markets. A plunge in our real-time big-data activity indicator in the US, ARIA, hints at a possible softening in 2Q GDP tracking estimates. Such softening could challenge the conjecture that the gap between soft surveys and hard data will be closed by the subdued hard data converging to elevated sentiment levels.”
As for Zentner, her takeaways are two-fold:
- (1) ARIA suggests that the bank’s 2Q GDP tracking will soften over the coming weeks from its current level of 3.9%,
- (2) This could be another temporary disconnect between ARIA and GDP as happened in mid-2014 and mid-2016 when ARIA softened yet reported GDP growth remained robust.
Conveniently, if it ends up being the former, Wall Street economists now have the first “global ranswomware attack” scapegoat excuse to explain why for yet another quarter, US GDP growth is simply not there.