Growth Views
Profitability Pressures Emerging
Welcome to Prometheus Asset Allocation. The Prometheus Asset Allocation program offers a stable, macro-focused approach to asset management. Prometheus Asset Allocation aims to outperform a traditional stock and bond portfolio by leveraging our proprietary systematic macro process to rotate between 3 ETFs monthly (plus cash). As part of the program, we will be sharing our views on Growth, Inflation, and Liquidity in addition to our monthly video updates.
Our primary takeaways are as follows:
In September, GDP came in at 0.23% versus the prior month. This was primarily driven by contributions from consumer spending.
While strong consumer spending continues to contribute steadily to nominal growth, the growing gap between income and spending is turning into a drain on corporate profitability.
Additionally, business investment in residential and industrial equipment has also declined sequentially, further showing increasing signs of slowing and emerging pressures on profitability.
In the context of markets, these dynamics are increasingly less supportive of equities. Bonds continue to be well suited to this environment, but richly priced. Finally, commodities are likely to suffer the most from these cyclical pressures. Our Asset Allocation changes will reflect these dynamics.
Today we share our Growth Views. Below, we show our proprietary Prometheus Growth Index which offers us a real-time insight into the pressures on future growth conditions. This measure remains in the contractionary zone, suggesting stabilization within a slowing economy:
According to the latest data through September, our systems place Real GDP growth at 2.27% compared to the previous year. Below, we show our monthly estimates of Real GDP relative to the official data:
In September, GDP came in at 0.23% versus the prior month. Below, we show the weighted contributions to the most recent one-month change in real GDP and the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below:
Business cycles are a function of cyclical revenues, profits, and employment fluctuations. Archetypically, some areas of the economy are more exposed to these cyclical fluctuations. These sectors experience far more cyclical NGDP than other segments of the economy, and tracking their evolution allows for a broader and more granular understanding of business cycle conditions. We show how cyclical nominal spending turns into cyclical real spending and plays a dominant role in driving business cycles, as detailed below:
Now we present a component-wise breakdown of GDP. We begin with consumption expenditures. In September, real consumption spending increased by 0.21%. Over the last year, consumption has added 2.02% to GDP growth of 2.27% and has been the primary driver of headline growth conditions.
This strength in headline consumption dynamics has been driven by stable nominal incomes. As per our latest report on employee compensation dynamics, we observed that nominal income increased marginally, primarily driven by real wage growth and employment.
However, this sequential strength in nominal income has become a drain on corporate profits as income growth has outpaced consumption growth. Zooming in, our estimates show that the household contributions to profits are now in contractionary territory. Note that this is a headwind for forward-looking growth dynamics.
