Weak Soft Data A New Trend?

The new trend I am focusing my attention on is the deceleration of soft data. I am predicting this decline because soft data usually doesn’t surprise to the upside for long. It’s also clear that the hard data isn’t following suit which means the economy isn’t strong. The weak GDP report acts as a signal to businesses that the economy is weak and makes them pause their aggressiveness on new initiatives. Obviously, the most critical focus businesses have is how their sales are doing, but managers are always looking at the general economy to see what the future may hold. Just because some sluggish quarters in this recovery haven’t led to a recession, doesn’t mean it doesn’t have a negative self-fulfilling nature. When you play with fire long enough, you’re bound to get burnt eventually. Finally, the fiscal stimulus which was expected by small businesses hasn’t been enacted which should disappoint them. There is no exact date which I can point to where small businesses will lose hope for tax cuts, but I expect this loss of hope to gradually start showing up in the data in the next few months.

The biggest factor in determining if I continue to discuss this theme is if the soft data confirms the narrative. If not, I’ll admit I’m wrong and discuss how great the soft data remains. In my last article, I discussed some the reasons why earnings growth has accelerated in Q1. One of the bullish narratives on why earnings growth was up is because of a rebound in Chinese economic data. Just as this explanation started making the rounds, Chinese economic data has started to disappoint. The Caixin/Markit Manufacturing Purchasing Manager’s index declined to 50.3 in April which missed expectations for 51.0 and was down from 51.2 in March. This was the weakest growth since September 2016. Growth in the service sector also decelerated from 55.1 to 54.0 in April. It’s clear the Chinese economy is in a long term slowing trend as it has been for years, but the short term had perked up early this year. If that perkiness wears off, it’s bad news for firms like Caterpillar which finally had a decent report in Q1.