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Current economic data suggests that the U.S. and Global economies are in a weaker place than the last FOMC rate cut period.

 

In last week’s post, we discussed the monetary and fiscal policy conditions that were in-place the last time the FOMC started to lower interest rates.  As a follow up, we began looking at the economic and market conditions that were in-place in September 2007. 

Starting with the U.S. economy, the major indicators of economic growth and forward-looking metrics are all lower today than they were in September 2007. 

The OECD U.S. Composite Leading Indicator was above 100, signaling above trend growth, compared to 98.8 today.

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The U.S. ISM Manufacturing PMI was 54 in September 2007, compared to 49 today.  The New Orders component of the U.S. ISM Manufacturing PMI was 59, compared to 47 today.

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We see the same situation with the global economy.  The Global Manufacturing PMI was 52.6, compared to 49.5 today. 

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The breadth of Global Manufacturing PMIs above 50 in 2007 was over 90%, compared to 40% today. 

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The breadth of New Export Orders above 50 was 85% compared to 31% today.

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The OECD Composite Leading Indicator was 102, compared to 99.3 today.  The breadth of OECD Leading Indicators was much strong in September 2007, as 100% of the countries were above 100.  Today, only 14% are above the 100 level.

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Within the global market data, Europe was weakening, but was still in a stronger position.  The Markit Manufacturing PMI in the Eurozone was above 50 and 100% of Eurozone PMI countries had Manufacturing PMIs above 50.  Today, the Eurozone Manufacturing PMI is 47 and only 38% of countries have a Manufacturing PMI above 50. 

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China also had better economic data in 2007, as both Manufacturing measures and Services were at higher levels than they are today.

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One market-related indicator we wanted to point out is the global banking sector.  While there has been discussion about the improvement in the quality of bank balance sheets, we thought it would be helpful to highlight how much the equity value of many banking stocks has declined since September 2007.  The banks in several regions seem to have less ability to handle downshifts in the global economy than they did in 2007. 

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Given the current accommodative condition of monetary and fiscal policy, the U.S. and global economic data, and the lack of recovery in the banking sector in many regions, it appears that the global economy is in a weaker place than it was in September of 2007. As a result, it is possible that stimulus efforts may not be as effective as they were the last time the FOMC began lowering interest rates. 

 

Rank Dawson, CFA
Vice President, Investment Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.