With certainty, the rate of growth in the domestic economic recovery is growing more ambiguous. For the first time in over three years, the ISM manufacturing index slipped below 50 in June. Especially conspicuous has been the weakness in exports, which reflects a global slowdown. Domestic orders, too, are falling off as backlogs are dropping and delivery times are shortening. At the same time, the service industry's PMI has fallen from a high of over 62 four months ago to only 51.7 in June, the lowest reading since 2009. This is taking a toll on the jobs market, with the jobless rate stuck at 8.2% and with payroll increases averaging less than 100,000 per month over the last three months. The one bright spot is the U.S. housing market, which is providing some support to the economy after acting as a drag since 2007.
Despite clear signs of slowing growth, earnings forecasts have yet to be reduced.
Consensus forecasts (implicit in $100-plus-per-share 2012 S&P 500
earnings) are for about 5% year-over-year growth in profits in second quarter 2012 and for about 6% growth in this year's second half. As sales gains slow coincident with a deceleration in worldwide economic growth and as policy inaction breeds more uncertainty, these profit projections are now in jeopardy. Already, there are warnings signs from companies in a wide range of different industries, including Nike (NKE)
, Procter & Gamble (PG)
, Caterpillar (CAT)
, Ford (F)
, Informatica (INFA)
and Seagate Technology (STX)
My direct communications with the managements of companies I research enforce the notion that growth is slowing and profit expectations are too high.
Despite trillions of dollars in global easing since 2008, the domestic ISMs and other leading economic indicators are signaling that growth is slowing relative to expectations as structural headwinds, continued deleveraging and policy uncertainty are producing a tepid recovery.
The major categories of retail, technology, industrial and financial are all beginning to experience misses relative to consensus.
June retail sales were generally soft relative to consensus, with the high end notable in its weakness. Surprisingly, weakening gasoline prices have had little positive impact on the consumer.