US economic data has been coming in drastically below economists’ estimates of late. Last week we noted that the string of weak readings has been extra painful for housing, with a truly weak residential construction report and a slower than expected homebuilder confidence reading. It hasn’t been all bad news for US data of course; the Atlanta Fed is currently tracking 2.9% GDP in Q2, while the St. Louis Fed model sees 2.32% and the NY Fed is tracking 1.86%. With trend growth around 2%, none of those are terrible. Relative to estimates, however, the data has been much weaker.
As shown below, the Citi Economic Surprise Index, which measures the pace at which indicators are beating estimates, has hit its lowest levels since the summer of 2011, when the economy hit an air pocket at the same time Washington debated raising the debt ceiling and created unnecessary uncertainty (eventually leading to a downgrade from S&P). While recent activity hasn’t been terrible, it’s extremely underwhelming due to the high expectations of economists. That doesn’t mean the economy is crashing; instead, economists will likely cut estimates, data will be stable or possibly tick up a bit, and suddenly the surprise index will rebound. To illustrate the process, below we’ve charted the Citi Economic surprise index and a good old fashioned sin function (remember those from middle school trigonometry?). You can’t use a sin function to predict when or how high the Citi Economic surprise index will bounce, but they are both cyclical, rising and falling back and forth over time. With economic surprises currently coming in worse than all but 5 prior periods of weak data in the history of the Citi index, it’s likely that chastened economists will start underestimating economic performance soon, at least at the margin, restarting the whole cycle to the upside.