Checking the Gauges: Economic Surprise Indexes

Economic Blog

Thursday, May 27, 2021

In terms of whether economic data is either beating or missing economists’ forecasts, it appears conditions may now be a bit better overseas. Driven by some improving COVID-19 trends, the economic backdrop has improved overseas, while high economic expectations have proved to be a more formidable hurdle here in the U.S. This improvement has helped to steady the foundation in many non-U.S. equity markets, and has caused us to improve our outlook for developed non-U.S. stocks.  We believe the improving COVID-19 trends in Europe could be particularly sticky as vaccine distribution becomes more widespread.

For several years now, being underweight European equities, relative to the U.S., has been a winning trade. A sea-change in that thinking could be approaching as value-heavy European indices have gotten some attention with the improvement from value, but a firm, constructive view of European equities may still be some ways off.

The Citigroup Economic Surprise Index, or CESI, tracks how the economic data fare compared with expectations. The index rises when economic data exceeds Bloomberg consensus estimates and falls when data is below forecasts. As shown in the LPL Chart of the day, economically, global conditions remain rather strong, as evidenced by these indices, which remain above the zero line. This reflects economic data coming in better than expected in several geographic regions. The repair of global trade activity, as supply lines are reconnected, has been notably key in non-U.S. data outcomes.

View enlarged chart.

Looking ahead, we expect now elevated economic expectations, particularly in the U.S., may prove a tougher target.  As a result “economic surprises,” both in the U.S. and abroad, may fade as we move through the year. However, the overall global growth trajectory is expected to continue to be robust through 2021. Global real GDP contracted 3.3% in 2020, and it is expected to rise to +6.0% in 2021, according to Bloomberg’s consensus estimate, before ticking down to +3.4% in 2022.

“Although high U.S. economic expectations could be tough to beat for the remainder of 2021, we still believe U.S. stocks should make up a material portion of equity portfolios. And even though economic expectations are being more readily exceeded overseas, it is tough to overlook U.S. companies’ innovation and profitability advantages.” explained LPL Financial Director of Research Marc Zabicki



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References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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