SocGen Predicts Imminent Downturn in US Economy

Famously bearish Societe Generale strategist Albert Edwards says that a strong economic indicator getting a lot of attention is an "illusion."

The Institute for Supply Management Manufacturing PMI hit a 14-year high last month, and was touted by many as a sign of the US's economic strength, Business Insider reported.

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 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 sometime 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.

"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.