Albert Edwards says booming US economy is an illusion

Former
White House adviser claims she once saw President Donald Trump
eat paper in the Oval Office.
Evan
Vucci/AP

• Famously bearish Societe Generale strategist Albert
  Edwards says that a strong economic indicator getting a lot of
  attention is an “illusion.”
• The ISM Manufacturing PMI hit a 14-year high last
  month, and was touted by many as a sign of the US’s economic
  strength.
• Look beyond the obvious, however, and a clear slowdown
  is underway in the US economy, Edwards says.

The blockbuster economic growth manifesting itself in the United
States right now is a mere “illusion” and a whole bunch of data
is pointing to an impending slowdown. So says permabear Albert
Edwards in his latest note to clients.

Societe Generale’s notoriously bearish strategist is once again
predicting an imminent downturn in the US economy, saying that
this week’s impressively strong manufacturing data is masking
much bigger issues.

ISM’s purchasing managers’ index for manufacturing, which
tracks sentiment in the industry and is highly respected by
economists, printed at 61.3 in the month of August, the highest
level in 14 years. That’s just 0.2 percentage points away from
the best reading in nearly 35 years.

Edwards, however, argues that beneath the rip-roaring performance
of the manufacturing sector, signs are clear that the good times
are going to come to an end some time soon.

“August’s US ISM was a blowout data point showing US
manufacturing is booming fit to bust!” — Edwards wrote to clients
in his weekly global strategy note on Thursday.

“This data point contradicts a lot of other evidence that lurks
just behind President Trump’s veil of fiscal profligacy that a
notable slowdown is already underway,” he continued.

“Scratch the surface and the opacity of this illusion of economic
strength is all too apparent.”

Edwards looks to the IHS Markit PMI surveys to illustrate a
slowdown is picking up steam in the US economy. The surveys,
which measure a similar set of factors as the ISM, have been
showing a steady slowdown since around April, as the chart below
from Edwards shows:

Societe Generale

“Although the ISM is the more established survey, it has been
showing unusual volatility recently, whereas the gradually
slowing PMI series ties in with other economic data,” he told
clients in the note, titled “US booms despite EM crisis, trade
wars and more. Yeah right!” 

Edwards then points to Citi’s Economic Surprise Index, which, as
its name suggests, tracks surprise economic data in the US. The
index, he says, “seems to concur with the Markit PMI showing that
the economy seems to have gone off the boil somewhat.”

Further evidence of his point, Edwards says, comes from
David Rosenberg, the chief economist at Canadian wealth manager
Gluskin Sheff.

Rosenberg’s argument, Edwards says is that: “The ISM should be
used in the same way as technical analysis uses the put/call
ratio or the speculative positioning data from the CFTC (i.e.
when the economic data, market sentiment or positioning is
strongly in one direction, it pays to bet the opposite way).”

Effectively, the ISM is a contrarian indicator of the true state
of the economy.

Finally, Edwards says the likelihood of a recession in the next
12 months is rising, at least according to data from the New York
Federal Reserve.

“Maybe the 14-year record high in the ISM should be seen as a
contrary indicator after all,” he concludes.

Societe Generale