Earnings revisions suggesting economic resilience
Wednesday, June 25, 2008 at 10:01AM
Simon Ward

Revisions to equity analysts’ forecasts for company earnings often provide useful information on changes in economic conditions. A key indicator is the “revisions ratio” – the difference between the numbers of forecast upgrades and downgrades each month, divided by the total number of analyst estimates. In theory, the ratio should be close to zero when the economy is growing at its trend rate.

The charts below show annual growth rates of G7 and emerging E7 industrial output together with revisions ratios for developed and emerging equity markets. Earnings revisions are clearly a good coincident indicator of the industrial cycle in both the G7 and emerging economies.

The developed markets revisions ratio plunged in early 2008, confirming a slowdown in G7 industrial growth. However, the fall partly reflected large financial sector write-downs and exaggerated underlying economic weakness. The ratio recovered strongly in June: financials remained a drag but higher oil and gas prices led to upgrades in energy company earnings forecasts and other sectors also registered improvements. Geographically, the US ratio was the strongest of the major regions.

The emerging markets revisions ratio shows a similar pattern of exaggerated weakness in early 2008 followed by a significant recovery. The June reading is suggestive of continuing solid growth in the major emerging economies.

Earnings revisions may well show renewed weakness over coming months but the latest numbers are consistent with global economic resilience, as forecast here.

G7_Industrial_Output_WR.jpg

Emerging_E7_Industrial_Output_Revisions.jpg

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