To Understand the Macro, Study the Micro

Right now, second-quarter earnings reports may be a better guide to the economic outlook than official statistics. 

Our major central banks are now avowedly “data-dependent.” And if we believe the latest from U.S. Federal Reserve (Fed) Chair Jerome Powell, speaking at the ECB Forum on Central Banking last week, labor market data are what they are now most dependent on.

NB

We agree that where the labor market goes, there goes the economy. But looking one, two or three months into the past is unlikely to help investors prepare for the future. Empiricism might seem sensible when economic forces are so idiosyncratic and cycles are inflecting, but that is also when data tend to become noisy and subject to large revisions.

So, how should investors prepare?

At these cyclical inflection points, we believe top-down views need to be bottom-up informed; the macro should be micro. If there is weakness in the jobs data in three months’ time, it will likely be because companies started seeing weakness in demand three months ago and are cutting workforces today. In our view, that makes the second-quarter earnings season, kicking off this week, an important source of insight.

Choose Your Story, Select Your Data

To get a sense of how difficult forming a “data-dependent” view is, here’s a flavor of some recent jobs-market numbers.

Friday’s U.S. non-farm payrolls for June came in at 206,000, narrowly beating forecasts, though down from May’s numbers. But not only has this data from the Bureau of Labor Statistics been unusually volatile lately, its generally upbeat picture has been completely at odds with the same agency’s Household Survey, which showed unemployment ticking up—and no one seems entirely sure which is closer to the truth.