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Economic Cycle vs. Quality of Nowcasting

Ajit Agrawal, Rhea Pandit*, Neeraj Sudhakar

 

In our previous blogs, we established that i) the AKAnomics Nowacasting process can yield a strong barometer for the global economic growth, and ii) our ability to detect revenue surprises correctly (hit rate) has direct relationship with forward returns. Together, Nowcasting is of strong value to investors. In this blog we focus on the relationship between hit rates and the economic cycle, that is, should investors expect the quality of the Nowcasting outcomes to vary with the economic cycle.

 

Our findings are somewhat non-intuitive. We do find that the Nowcasting’s ability to find disconnects from consensus (hit rate) varies with the economic cycle. That is, higher economic growth leads to better Nowcasting revenue surprise signals. And at times of slower economic growth (as in the current period of 2024), the quality of signals is weaker. This can be seen in the 10-year chart below where the red line (total revenue growth which is a representation of the economic cycle – see previous blog) moves in line with the orange line (hit rate of the AKAnomics signals), if we ignore the periods around COVID (2020) and a year later (2021) which had known disconnect from economic data.

 



 

An obvious question then is why should the quality of the signals vary with the economy? We find that companies guide conservatively. During periods of high growth, this leads to conservative growth expectations set by Wall Street analysts (the consensus) as consensus tends to closely follow company guidance. This conservatism during periods of higher growth leads to a larger disconnect between AKAnomics Nowcasting estimates (which is entirely macro-data dependent and is not biased with company guidance or consensus) and consensus, which in turn leads to a higher ability to estimate beats and misses, and thus leads to higher hit rates. All the facts supporting this set of arguments were presented earlier in a blog for a slightly different context of establishing a relationship between Nowcasting and the economic cycle, and are not being repeated here.

 

 

* Rhea Pandit is a Summer Intern at AKAnomics Inc, and we thank her for her contributions. Rhea is an undergrad at Williams College.

 

**For the charts in this blog, we define the aggregate revenue growth as the average of the quarterly Y/Y revenue growth across the 100+ US Industrials and Materials companies we track. The aggregate revenue growth estimate refers to the average of the quarterly Y/Y revenue growth estimated by AKAnomics Nowcasting across the same group of companies. AKAnomics beat or miss signals each week is the set of companies estimated to beat or miss revenues, where the threshold for a beat/miss is 0.75 times the standard error for each company. AKAnomics hit rate is the % of beat or miss signals where the actual revenue growth and AKAnomics Nowcasting estimate of revenue growth end up on the same side of consensus irrespective of the magnitude of difference relative to consensus. We have argued in our earlier blog that this metric is a good metric for analyzing the quality of our Nowcasting process.

 

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