The Fidelity Leading Indicator finds a floor

The Fidelity Leading Indicator has stabilised at levels just a touch worse than the depths of the 2008 global financial crisis. However, it has yet to indicate anything close to a ‘V-shaped’ recovery. High-frequency indicators for economic improvement have stalled in some major developed economies since the middle of June. While the FLI may have lagged the speed of initial shutdowns and sharp re-openings, it could prove invaluable for gauging the trajectory of the grinding road to recovery ahead.

 
 

The FLI Cycle Tracker has stabilized in the bottom-left quadrant, with deceleration softening but growth still negative. The three-month growth seems to have reached a bottom; it indicates a quarterly rate of contraction only slightly worse than that seen at the trough of the GFC, though it’s yet unclear if we’ll see a similar sharp rebound.

The FLI quantitative ‘bet’ remains negative on risk and positive on duration, near the 24th percentile of history, but has improved somewhat from last month. All underlying sectors remain in the bottom-left quadrant, but four out five improved at the margin.

Business surveys had the most notable upturn, now not far from entering acceleration territory. As countries have exited lockdowns, sentiment turned positive and both the manufacturing and services sectors showed some optimism.

The Consumer and Labour segment, deeply affected by the Covid-19 crisis, has shown stabilisation albeit at very negative levels. US initial unemployment claims have improved sharply but remain extremely elevated, while non-temporary unemployment continues to accelerate under the surface. Consumer confidence has tentatively improved across regions, but remains well below pre-Covid levels and is fragile to second waves of the outbreak and further layoffs.

Global Trade remains in the ‘bottom-left’ quadrant with hard data and surveys weakening further, albeit at a slower pace. The Commodities sector seems to have reversed its downward trend, as shipping cost indices have recovered strongly.

Despite nascent positivity in business surveys and elsewhere, Industrial Orders have not experienced any meaningful cheer as economies reopen. The sector again shows broad-based deterioration. Japan’s inventory-to-sales ratio has reached all-time highs, and the picture is similar in the US and Germany, highlighting a slow recovery in industrial demand.

The FLI, like many other indicators, suggests that the global growth outlook is past the worst. Economies continue to reopen, and any subsequent lockdowns look set to be more targeted and less draconian. However, the FLI is far from indicating a genuine V-shaped recovery, whereby catch-up growth returns activity to near-normal, and subsequently growth reverts to trend.

Looking at high-frequency big data indicators, many Western economies are settling with activity somewhere around 5-10 per cent below normal. Indeed, economies including Australia and the United States have stagnated on these measures since mid-June, suggesting the next batch of monthly business surveys could be more mixed.