Surprise! This is the gloomiest you’re likely to be about the economy this year

Statistically speaking, now — the start of summer — is the winter of our economic discontent.

The Citi US economic surprise index measures how much data released over the past three months has exceeded or fallen short of economists’ expectations. From 2011 through 2019, this index displayed some interesting seasonal tendencies. On average, this series usually starts off well before fading strongly into mid year, bottoms on June 28th, and then rises into year-end.

About a decade ago, The Globe and Mail’s Scott Barlow, a veteran mutual fund analyst and journalist, dubbed this “the hammock pattern” for, well, obvious reasons.

A trend of early-year over-optimism has also been present in key market and economic variables. From 2011 through 2019, earnings per share estimates for S&P 500 companies as well as the expected rate of US GDP growth for a given calendar year have tended to be revised lower as time passed.

Economic surprise indexes are a little different in that they typically mean-revert back towards zero. The logic underpinning this: If analysts make consistent forecasting errors in the same direction, enough one-way failures spur a re-calibration and over-correction in the opposite direction.

If there’s a fundamental cause behind the twists and turns of this particular pattern, it may rest in gas prices, which are usually inversely correlated with economic surprise indexes and also often top in the summer months (the peak driving season).

The pandemic disrupted economic activity significantly — causing abrupt changes in the economy linked to the timing of shutdowns, stimulus, and re-opening that spurred outlier moves in prices, spending, and employment that didn’t really conform to seasonal norms.  In addition, the rate of nominal growth (real activity plus inflation) has been much higher and more volatile over the past four years. As such, the hammock pattern hasn’t been as seemingly reliable as it was pre-pandemic. 

But so far this year, the index is displaying some of its old seasonal behavior. Well, at least the bad part. Recently, the US economic surprise index slumped to -29, its lowest level since mid-2022.

This perceived loss of growth momentum has been accompanied by an actual moderation in activity. Separately, there’s been softness in Citi’s US economic data change index, which tracks how well or poorly the data are relative to their one-year average, and has declined to its lowest level of the year.

Some stabilization or improvement in either investors’ perception of the economic data – or the data itself – may be needed to shift the dominant meta in the stock market, which in 2024 has been defined by the outperformance of megacaps (especially in the tech space, and Nvidia in particular) relative to the many other stocks that comprise the S&P 500.

22V Research chief market strategist and founder Dennis DeBusschere is calling for stock-market strength in some of the areas that have lagged behind, like banks, transportation (ex-airlines), energy, and real estate investment trusts.

He laid out the case for investors’ confidence in the durability of the US expansion to improve in the weeks ahead, making two points in a note to clients this week.

“First, the odds that both the US economic diffusion index and the Citi surprise index move significantly lower from here, are low (they have already registered sharp declines),” he wrote. “Second, some moderation in economic growth, which is happening now, will be taken as benign by investors (unless there are sharp downside surprises).”