Weak crude prices have caused a lot of anxiety about the domestic economic outlook but it's the U.S. economy – carrying more of the weight of global growth expectations than at any time since the financial crisis – that has been far more disappointing.
The Citi Economic Surprise indexes are relatively new investment tools but they've gained an avid following among professional investors as a means of tracking national economic growth. The indexes measure major economic data points relative to consensus economic forecasts. When the index moves higher it means that results are coming in ahead of expectations and the economy is gaining momentum. The reverse case – a falling surprise index and disappointing data – is what we're seeing now on both sides of the border.
There are seasonal patterns for the Canadian and U.S. surprise indexes. The typical pattern in the United States looks like a hammock – early year optimism gives way to steady economic disappointment until June, when a reset of expectations results in index improvement until December.
The trends for the Canadian economic surprise index also start with a decline – economists tend to err of the side of optimism at the beginning of every year, it's good for business – but it lasts only two months, shorter than the six-month decline common in the United States. Results usually start improving in February or March, then erode again in the third quarter.
This year has seen a disquieting start for the U.S. index which started low and headed immediately south. If, like most years, the weakness continues until June the index readings could get alarmingly low.
In Canada, conversely, there is reason for short term optimism. The end of February is typically when the domestic economic surprise index stops falling and begins climbing until the middle of the year.
In both countries, the surprise index defies the dominant investment themes. In Canada, investors are justifiably concerned about the economic fallout from falling commodity prices, but the surprise index looks completely normal (so far). The remarkably weak U.S. surprise index opposes the broad belief that the country will lead global growth as Europe and the emerging market economies struggle.
Importantly, weaker surprise indexes do not automatically mean that actual economic growth is slow – merely that data are being reported below expectations. It's possible that U.S. growth will be solid and that economists were merely overly optimistic. And to be fair to the Americans, recent reports on wage growth and new home sales were encouraging and the odds of avoiding the usual first half slowdown are rising.
The Citi Economic Surprise Index for the U.S. is clearly the more important one to follow, even for Canadian investors. With Asian economies slowing and Europe still weak, a disappointing U.S. economy threatens both domestic exporters and the more than 30 per cent of the Canadian market that relies on global commodity demand.
Follow Scott Barlow on Twitter @SBarlow_ROB.