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Morgan Stanley Warns Business Conditions are Deteriorating Rapidly

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Morgan Stanley Warns Business Conditions are Deteriorating Rapidly

By John McDonald

American businesses are in greater peril now than they have been since the 2008 financial crisis, and things could get even worse. According to Morgan Stanley’s proprietary Business Conditions Index (MSBCI), the U.S. business market experienced its sharpest collapse on record last month, indicating an economic slowdown could be heading our way. So far in June, the index has fallen 32 points, to level 13 this month from level 45 in May. Not since December 2008 has the index measured so low.

“The decline shows a sharp deterioration in sentiment this month that was broad-based across sectors,” wrote economist Ellen Zentner in response to the index reading. She added, “Fundamental indicators point to a broad softening of activity, but analysts did not widely attribute the weakening to trade policy.”

Zentner’s opinion on trade policy flies in the face of many analysts’ take on the issue of the American economy, a potential recession, and the ongoing trade standoff between the United States and China. Analyst Mark DeCambre wrote in his coverage of the index reading’s decline, “Swirling anxiety around the U.S.’s trade relationship with China and other major international counterparts has hurt the confidence of business leaders because the unresolved tariff battles have made it difficult for corporate chieftains to develop business strategies and forced many companies to alter their supply chains.”

Slowdown in Jobs Growth

Morgan Stanley analysts warned the index could reflect “an apparent slowdown in domestic jobs growth” as well. Zentner said the index reading corresponds with May employment trends. In May, the United States created just 75,000 new jobs, far off the forecast 185,000. The slowing rate of job creation combined with a deteriorating business environment could herald what DeCambre described as “a significant change in momentum in what has been a pillar of strength in the domestic economy.”

Morgan Stanley analysts went further, warning that the MSBCI metrics, when combined with other metrics that “drill down deeper into financial conditions,” could “point to business expansion coming to a near halt in June.” The MSBCI measures hiring, hiring plans, capex plans, and business conditions exceptions. A related manufacturing subindex fell to zero last month, which Zentner blamed on a “recent turn lower in oil prices.”

What This Means for the Markets

Although U.S. stocks were trading strongly earlier in the week although they stagnated in the latter half, measures and metrics like the MSBCI are likely to send investors scurrying to shelter, selling off investments in the process. Many analysts predict that the markets will falter in June, but not all analysts believe the correction will be long-lived. This is particularly true for analysts who believe the MSBCI is too volatile to be taken entirely on its own.

“I think some of it goes back to its highs [by the end of June], said CFRA chief investment strategist Sam Stovall. “Normally, it takes about a month and a half to get back to break-even. This could happen in less than a month,” he said. Whether Stovall, Zentner, or someone falling in the middle is right, however, predictions of “June Gloom” for the markets have many investors seeking safe havens like gold and precious metals for their investment capital.

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