Just a quick comment as I am still out of sorts due to the 8 hour time difference and some Jetlag:

The data continues to come in showing the global economy is slowing. The key question is whether this slowdown is to full on recession or merely a sloppy-muddle-through-barely-above-stall-speed economy.

With all of the cross currents out of Europe and the US, its easy to get distracted with less important nonsense. We watch all of the usual macro signs, but to find clarity, watch this earnings season. I want to especially pay attention to the following 7 factors:

• Transports have been very soft and confirm slowing global trade. Pay attention to UPS, Fed Ex, and Rails.
• A corollary is energy prices and the shifting revenues of the major oil companies.
• Retailers often feel the bite first. Middle market retailers, than luxe goods. Watch for signs of improvement amongst the discounters like WalMart, Target and the dollar stores as consumers feel stressed.
• Defensive issues such as Utilities and Consumer Staples attract buyers (but should not see big changes in revenues)
• Pay attention to visibility and revenue expectations from companies. I expect the uncertainty trope t0 be in full flower;
• More  important than that, watch S&P500 Quarterly earnings growth; Is the rate of growth (2nd derivative) slowing?
• Valuations remain reasonable but not cheap; See where the SPX ends after earnings season is over.

These earnings are where the rubber meets the road, and I expect them to be telling.

More later . . .

Category: Earnings, Economy, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “7 Factors To Watch in a Slowing Economy”

  1. [...] Barry: 7 factors to watch for this earnings season.  (TBP) [...]

  2. postman says:

    So we will see if ECRI’s “unblemished record” is maintained. What counts as a correct call for them–an NBER denoted recession with any ECRI prediction lag? With a prediction lag of any length, it’s hard to be wrong.

  3. Alex says:

    When you say “is the rate of growth (2nd derivative) slowing”, do you mean is the third derivative negative? Unlike the second derivative, it’s hard to determine the sign of the third derivative just from looking at the graph.

  4. constantnormal says:

    Hmmmm … 7 items, all pertaining directly to companies and their stock prices, not a one to the situation of the global consumers, their wealth and employment situation … Which would provide a clue toward the demand for the goods the companies provide.

    Stocks are not abstract entities that live in a vacuum, they are but an aspect of a living economy.

    What would one see if one included global consumer data in the mix? Perhaps an indication to be looking elsewhere that the developed world, or at least focussing on companies that do a lot of export business to the emerging nations …

    Admittedly, that includes a BUNCHA companies, with GM and Ford likely selling more cars outside the

  5. constantnormal says:

    Crap. DAMNED WORDPRESS! Hit the wrong key, and it instantly grabs the text, no confirmation, no opportunity to edit … Wotta piece of crap.

    Ah hell, you can get my drift ..

  6. ashpelham2 says:

    I’m still not buying a full on US slowdown. I can see some slowdown in specific regions/industries/even down to the company level. But I don’t think the US as a whole slows down a lot from here. Of course, tepid last 3 years growth won’t take much of a statistical slowdown to show up as a recession.

    And as usual, the stock market will be completely disassociated with the current economic conditions. And as usual, the fed will be strong-armed into coming in and doing something unnecessary like QE3. I don’t see what cards they have left to play. GOD help us if interest rates go any lower.

  7. ironman says:

    Picking up on Barry’s sixth factor:

    More important than that, watch S&P500 Quarterly earnings growth; Is the rate of growth (2nd derivative) slowing?

    The short answer is yes, as it applies to dividends (see third chart), which represent the sustainable portion of earnings that directly drives stock prices under typical conditions.

  8. constantnormal says:

    ashpelhams2 says … “GOD help us if interest rates go any lower.”

    check the 5-year TIPS rates … they can still go lower …

    http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

  9. MikeDonnelly says:

    I think mother Merrill L. said Q1 at 1.9% Real GDP would be fastest quarter of growth in 2012? Is that possible ?

  10. [...] –What to Watch: Barry Ritholtz offers seven factors to watch in a slowing economy. Here are the first four: “–Transports have been very soft and confirm slowing global trade. Pay attention to UPS, Fed Ex, and Rails. –A corollary is energy prices and the shifting revenues of the major oil companies. –Retailers often feel the bite first. Middle market retailers, than luxe goods. Watch for signs of improvement amongst the discounters like WalMart, Target and the dollar stores as consumers feel stressed. –Defensive issues such as Utilities and Consumer Staples attract buyers (but should not see big changes in revenues)” [...]

  11. Are conglomerates like GE and Berkshire still considered bell-weathers for the health of the US and the global economies?

  12. RC Exclusive says:

    @Alex I’ve noticed this misuse of the term “second derivative” before. The rate of growth is the first derivative, and this is what is being referred to here. In order to see if the first derivative is slowing, we would look at the second derivative and see if it has become negative.

    But checking to see if the second derivative is slowing is meaningless and is not what BR is instructing, despite the confusion in calculus terms.

  13. [...] Recession or muddle through: seven things to pay attention.  (Big Picture) [...]

  14. scm0330 says:

    Transports have been weak? Sorry, don’t see it.

    ~~~

    BR: Check your P&L — Trannies down 15% in 3 months

  15. san_fran_sam says:

    “…the shifting revenues of the major oil companies.”

    Barry,
    Could you say something more and expand on this? What do you mean by “shifting” revenues?

  16. scm0330 says:

    Mmm, not sure about that. How about we check the Dow Jones Trannies. I don’t see a 15% swing, anywhere…and the rails and UPS/FDX in particular have not cracked.

  17. Look at the Nasdaq Transport Index

    And these are two broken uptrends

    Fed Ex

    UPS

  18. 10x25mm says:

    An eigth factor, U.S. motor vehicle fuel fuel consumption:

    Gasoline, April 2012: 29,716,400 gallons per day
    Gasoline, April 2011: 41, 555,000 gallons per day

    #2 Diesel, April 2012: 10,146,000 gallons per day
    #2 Diesel, April 2011: 10, 507,000 gallons per day.

    As reported by U.S. Energy Information Agency, 02 July 2012.

    Commercial motor vehicle usage is only down only 3.44 % yoy, but passenger car usage is off 28.49 % yoy. Clearly consumers are not splurging.

  19. scm0330 says:

    …it looks like new uptrends for both, beginning in June!

    Seriously, BR, the trannies (and all I generally look at are rails and air freight, not the airlines) should be weaker, should have already confirmed what we seem to be learning from the industrial economy on a daily basis, but they haven’t…yet. In fact, they’ve outrallied the broad market since the June low.

    It makes me wonder if things ain’t so bad, despite the pervasive stink of fear that’s out there.

  20. blackjaquekerouac says:

    this is no mere slowing. This is a full fledged TAKEDOWN…and we need only one indicator to watch: NATURAL GAS. Patriot coal is now bankrupt. Don’t worry sheeple…it’s no biggie! Wanna go hog wild in the corn space folks? BE MY GUEST! Think the way forward is diesel engine tech? hahahaha. that’s a good one! perhaps what you meant to say is “give me China or give me death”? Well…sure, if you’re a Federal Program maybe. the fact of the matter is prices are COLLAPSING and if you haven’t been in treasuries for the duration…YOU’RE FIRED!