16 Months And Counting

In his 2016 State of the Union Address, President Barack Obama accused those claiming the American economy is in decline of “peddling fiction”. Few economic prognosticators have actually stated that the U.S. economy is in decline. However, many including ourselves have pointed out that economic growth has been declining for years and the key drivers of future growth – productivity and demographics – are quickly becoming economic headwinds. All the while, the nation’s ability to enhance economic growth by increasing an already burgeoning debt load is greatly limited.

We write this article to warn our clients and readers that recent Wall Street economic forecasts should be taken with a grain of salt. With GDP averaging below 1% for the last six months, it will not take much of an additional slowdown to put the U.S. in recession. Relying on overly optimistic economic forecasts could easily cause investors to miss signs of a recession and, as laid out in “Dear Prudence”, miss an opportunity to sell assets before a major drawdown. After reading this article, you may have a new appreciation for who is “peddling fiction”.
Citi Surprise Index Update

In “Eliminating Surprises Using Citigroup’s Surprise Index” we described the uniqueness of the Citi Surprise Index (CSI) as a gauge of economic forecasting. In the article we advised that investors should focus on the magnitude and duration of forecasting errors to gain better insight into how well or poorly Wall Street economists are currently modeling the economy. Those two factors allow investors to gauge the grasp economists have recently had on the state of the economy. With this understanding, investors are better equipped to deal with economic surprises. For instance, when the CSI is consistently posting large positive numbers it implies that economists’ models are underestimating growth. When such a condition persists investors can have increased confidence that forthcoming economic data may be better than expected. The opposite is true when the CSI is consistently below zero.