Macro Wrap – Only in Hindsight

by Enis May 1, 2013 7:48 am • Commentary

As we await the ISM report today, there is a growing concern that the manufacturing sector in the U.S. is falling into contraction.  The survey expects a 50.6 reading, but some are expecting a miss based on the weak regional manufacturing surveys so far this month.  The ISM Manufacturing report has not come in below 49.5 since 2009, and would be one of the more concrete signs of economic slowing.

Does the current earnings season confirm the macro data weakness?  Goldman Sachs research puts out an interesting report that tracks the underlying business activity in the economy based on corporate earnings releases.  Here’s their summary of April’s reports:

  • The Goldman Sachs Analyst Index (GSAI) fell 6.5 points to 42.7 in April. The composition was also weak with sharp declines in the new orders and employment indexes. The weakness is consistent with a relatively downbeat bottom-up message about revenues from recent corporate earnings reports, and supports our below-consensus forecasts for the ISM manufacturing and nonmanufacturing indexes this week.
  • Analyst commentary was a touch more optimistic than the numerical indexes would suggest. Ongoing weakness in Europe remains the key risk abroad.

Perhaps more intriguing was the diverse set of industry commentary.  Some areas are feeling the impact of the sequester and payroll tax hike, while other businesses are cruising:

Communication Technology:

We have had two negative preannouncements, one specifically related to weaker federal spending and weaker telco capex. However, another company discussed stable economic activity and carrier spending, with expected improvement in 2Q. Investor expectations have come down over the past several weeks, such that they are now expecting a more muted/disappointing earnings season.


Some smaller suppliers have started to see an impact from sequestration on orders and shipments. Larger suppliers have been fairly insulated thus far, and management teams seem confident in full-year outlooks although bookings have declined sequentially from 4Q12.

Food & Dollar Retail:

Higher end retailers seem to be experiencing greater volatility with market uncertainty. Cooler weather may be causing some shifts in food. It appears fewer consumers are eating out at restaurants and replacing that spending with meals at the supermarket for consumption at home.

Gaming and Lodging:

In 1Q13 we saw revenue per available room growth come in at 7.2%, up from 6.5% in 4Q12. 1Q13 came in better than expected given a full year expectation of roughly 5% from company managements.

Life Science Tools and Diagnostics:

No material decrease in customer spending patterns as a result of sequestration through early March. However, since mid-March, two companies have negatively preannounced 1Q results due to a slowdown in government funding and associated customer spending. To a lesser extent, two lost selling days due to the holiday timing was also a factor.

Given these two negative preannouncements, we see mounting concern among investors that the capital equipment-driven companies under our coverage saw similar drop offs late in the quarter as orders may have been pushed out. That will be a key question during 1Q earnings season.

Media & Entertainment:

US advertising demand was stronger in 1Q13 than in 4Q12. No indications on 2Q13 yet.

The main theme continues to be weakness in “capital equipment” and industrial areas, while the consumer carries the baton.

Perhaps the most important aspect of the current market though has been its reaction to news rather than the news itself.  As Leon Black of Apollo noted yesterday, this is a great time to be a seller.  But clearly, based on market prices, there are many willing buyers meeting those offers.  At some point, the tide will change, and likely quite swiftly.  And when it does, it will look obvious in hindsight, based on all the fundamental signposts that were on the wall.  Only in hindsight of course.