Everybody knows business sentiment has deteriorated over the past year in the US.
There’s no real mystery behind that deterioration. The cycle is aging (indeed, it’s elderly), the trade war got progressively worse, global growth decelerated and stocks sold off sharply while credit spreads widened in Q4. At the same time, the effects of fiscal stimulus in the US are waning, corporate profit growth has stalled, margins have likely peaked and uncertainty is rampant – just ask the June Fed minutes, which contained nearly two-dozen mentions of the word “uncertain”.
Things hit something of a nadir in June, and there for a minute, it looked like the global factory slump had made landfall in the US. The Empire manufacturing index, for example, fell the most MoM on record, while MNI’s Chicago gauge fell into contraction territory. Mercifully, New York manufacturing activity bounced back in July, and the Philadelphia gauge surged the most in a decade.
Whether the bounce is sustainable remains to be seen.
For their part, Goldman isn’t satisfied with any anecdotal assessments of what contributed to the slump in sentiment and, so, the bank set about building an aggregate measure based on the following methodology (from a Friday note):
By combining lists of negative and positive words designed specifically for working with financial, political, and economic texts, we create a sentiment dictionary that assigns a semantic orientation to a word – that is, whether it is typically positive, neutral, or negative. To extract the tone from 4,000 earnings and conference call transcripts, we first evaluate the orientation of each word in a document. Next, we give each transcript a sentiment score by calculating the difference between the share of positive words and negative words. We finally average the sentiment scores across each month to create an aggregate index.
Bet you haven’t done that at home, have you?
The bank checked the results against existing business sentiment indicators and found a generally good fit, and the scores assigned to earnings transcripts seem to line up with the overall thrust of those calls.
So, what is the key takeaway from Goldman’s work? Well, basically, the study suggests that anxiety has increased most over the past year vis-à-vis growth and international relations.
“There has been a sharp increase in negative mentions of our growth topic, which is consistent with slower domestic growth, while our topic of international relations – which contains references to foreign countries and trade – is somewhat less prominent than other topics, its co-occurrence with negative words has increased notably, and appeared responsive to the slowdown in global growth and continued escalation of trade tensions”, Goldman writes.
As you can see, the increase in worries about generalized “uncertainty” isn’t all that dramatic, nor is the uptick in mentions of “profits” in a negative context.
The upshot is that America’s largest companies are demonstrably more downbeat on growth and international relations than they were a year ago. Of course, all of this is a bit self-referential and circular. After all, arguably the main factor contributing to uncertainty is the fraught geopolitical backdrop with an emphasis on the Sino-US spat, which itself helps explain growth concerns.