We’ve recently seen a slowing pace of growth, large downward revisions to the pace of U.S. job growth and an ISM service sector reading that suggests this critical part of the economy is nearing stall speed.
Put them all together, they imply a possible economic turning point in the business cycle.
If that is the case, one should expect an increase in a series of forecasts of major economic releases to begin surprising to the downside.
One useful way to measure this idea is the Citi Economic Surprise Index, a quantitative metric that tracks how actual economic releases arrive compared to market expectations.
According to most observers of economic surprise indices, including the Federal Reserve Board, a positive reading of a surprise index suggests that economic releases on balance have been higher than consensus—which implies that economists are underestimating the strength of the recovery.
In contrast, negative surprises suggest that economists are underestimating the severity of a downturn in the business cycle.
The Citi Economic Surprise Index ended the first week of August at 5.5, down from 14.7 at the end of July and just below its series average of 5.6.
One gets the sense that economic analysts, equity strategists and fixed-income strategists have been a bit more optimistic about the economy than what recent data has warranted.
RSM’s forecast of 1.1% growth this year and 75,000 jobs per month in the second half of 2025—which we posted well before the recent growth scare—is predicated on a continuation of a series of disruptions, like those observed earlier in the cycle, adversely affecting the real economy.
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