Concern about a slowdown in the American economy has been gaining momentum recently, and it is not unfounded.
The most important characteristic of the equity market is that it always runs ahead of the real situation by a year or so. The market, I believe, has long been expecting the American economy to slow down, and it has long been revaluing companies downwards.
Examining a 36-year plot of the Purchasing Manager's Index (PMI) compiled by the Institute For Supply Management, together with a plot of American GDP growth rate, it is obvious as a leading indicator the PMI ran ahead of GDP growth.
Both figures show clear cycles with troughs in 1970, 1974, 1982, 1991 and 2000. Cycle duration lasted from 4 to 8, 9 and 10 years, getting longer and longer.
The latest economic cycle probably began in 2000 after the end of the internet craze and peaked in 2003, when the PMI reached a peak of 64 (threshold of expansion/contraction is 50). Real GDP growth peaked a year later at 4 per cent year on year. So far this year, on a 12-month basis, real GDP has slowed down to 3.5 per cent year on year, due to rapidly rising inflation which partially offset the still very robust nominal GDP growth of 6.5 per cent year on year.
Other macroeconomic measures moved in tandem but to differing extents. Property and car sales growth decelerated sharply. Personal consumption growth decelerated but was still at a high level of 6.2 per cent year on year.