The Observatory

Real GDP Contraction

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

Real GDP, profits, and the labor market are at a critical juncture in the economic cycle. Today, we received significant data updating our tracking of economic conditions. First, we received retail sales data, which decreased -1.15% in December, disappointing consensus expectations of -0.9%. This print contributed to a sequential deceleration in the quarterly trend relative to the yearly trend. Below, we show the monthly evolution of the data relative to its 12-monthly trend and consensus expectations:

We saw a broad weakness in total spending during this period, and we show the composition of this weakness below:

Importantly, both real and nominal retail sales remain on a decelerating path. Our estimate shows deflationary pressures on retail sales in December. Thus, while nominal retail sales contracted by -1.1%, real retail sales contracted by -0.7% this month, resulting in a yearly change in real retail sales of 1.4% versus the prior year.

This data was in line with our tracking of income conditions, with retail trade seeing weaker real incomes in December:

These data points reflect the potential for a contraction in personal consumption in December. This contractionary data would join already contractionary real investment data. Our latest estimates of real investment suggest significant weakness:

A significant portion of the weakness in our estimates of real investment come from our estimation of real residential investment:

Combined, these measures have come together to bring our tracking of real GDP into contraction. we show our latest estimates below:

Now, while this data is a significant development, it is still in its early stages. We will receive more confirmation as the date evolves. Nonetheless, this is a marginal step towards confirming our expectation that growth volatility will likely outshine inflation volatility in the coming months, resulting in a better environment for a portfolio of stocks and bonds. Within this context, our systematic exposures to stocks and bonds are holding steady (flat), despite weakness in the equity portion. For further context on our positioning, find below our most recent Prometheus ETF Portfolio rebalance:

Overall, data continues to evolve in line with a slowdown, which will drive profits lower, which and push labor markets lower. Amidst such an environment, market pricing of growth is likely to deteriorate significantly. Until next time.