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Societe Generale: Data Suggests 'A Sharp Slowdown In The U.S. Economy Is Imminent'

Societe Generale: Data Suggests 'A Sharp Slowdown In The U.S. Economy Is Imminent'
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In a recent report, analysts at Societe Generale gave their take on some recent economic data that suggests trouble could be brewing for the U.S. economy. While the Federal Reserve is considering a rate hike, Societe Generale analyst Albert Edwards believes the U.S. economy is headed for a slowdown.

Falling US Corporate Profits Forecast

The first indicator that the economy might be headed for a downturn is the falloff in forward earnings projections in recent months.

The graph below shows how the Japanese market’s 12-month forward earnings forecast has improved in a weak-yen environment, while the earnings outlook for the S&P 500 has deteriorated in a strong-dollar environment.

Payrolls A Lagging Indicator

The report notes that much of the recent optimism about the outlook for the U.S. economy has been centered around improving payroll numbers. However, Edwards points out that payroll numbers are a lagging indicator of economic growth, not a leading indicator.

In fact, the graph below shows that payroll numbers typically accelerate right up to the beginning of a recession.

Profit Growth Has Stalled

According to the Institutional Brokers Estimate System (IBES), profit growth in the U.S. has stalled as of late. Year-over-year sales growth and earnings per share (EPS) growth for the S&P 500 are nearly zero.

Energy Not A Scapegoat

It’s true that the collapse of oil prices has weighed heavily on the energy sector, but data indicates that Q1 earnings expectations for many other sectors have also been heavily reduced over the past year.

ECRI Leading Indicator

The final piece of evidence presented in the report is the Economic Cycle Research Institute’s (ECRI) weekly leading index, which now stands at 2.1 percent.

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“The current level is below that seen just prior to the 2008 recession and suggests, at best, a sharp downturn in the U.S. economy is imminent – confirming what the profits data above is also suggesting, “ Edwards explains.

Edwards explained there is no need for a Fed rate hike based on the evidence included in the report.

Such a hike, he wrote, could result in the Fed ending up a “market laughing stock.”

Image credit: Michael Daddino, Flickr

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