The Nowcasting Edge: Monthly AKAsights into Industrials / Focus on 25Q3

The focus of the 5^th Monthly AKAnomics Webinar was Q3 revenues – what the world’s economic data is suggesting, and how AKAnomics estimates are positioned relative to consensus. The discussion started out with some statistics from AKAnomics’ live data, followed by a discussion of the subsectors and industries within the Industrials and Materials GICS codes, leading into a discussion of BLS job revision, and Q&A.

1.       Live (Point-In-Time) Results

AKAnomics revenue estimates have had a hit rate (the right side of consensus) 68% of the time since going live in December 2022. This is true both for our weekly estimates, as well as the last estimate for the quarter before the earnings release. This is a strong fundamental out-of-sample statistic, consistent with our historical models. Additionally, a sector-neutral strategy (outlined in www.akanomics.com/resources) is showing 5.3% annualized returns and 1.4 Sharpe during this period.

2.     Q3 Revenue Estimates

In spite of all the rhetoric about tariffs and inflation, AKAnomics data suggests that Q3 revenue growth is slightly better than Q2, supported by improving industrial activities in North America, and Europe, higher output prices, improving orders, falling inventories, and positive currency contribution. Please note however that the improvement is slight.

3.      AKAnomics vs Consensus

The number of companies with disconnect with consensus (dispersion) has increased in Q3 to 36% (from 33% in Q2), though the numbers are lower than historical averages. The tilt remains close to zero, suggesting that the number of beats and misses are roughly balanced. Together they suggest a muted growth environment, and a stock-picking regime.

If we look into subsectors, we see the following groupings: i) Improving growth and Above consensus revenues (Specialty Retail, Household Durables, Containers & Packaging, Machinery, Auto Components); ii) Worsening growth and below consensus revenues (Electrical Equipment, Ground Transportation, Building Products, Chemicals); iii) Improving growth and yet below consensus revenues (Construction Materials, Metals & Mining).

As we dig deeper into the global macro data, we see improving growth in Steel prices, Non-metallic minerals volumes, and Agri machinery volumes, but worsening growth in trucking and rail transport prices, trucking volumes, electrical equipment volumes, electrical components orders, HVAC volumes, construction machinery volumes.

4.       Impact on AKAnomics estimates from BLS jobs revision

BLS payrolls data is a key input to AKAnomics company models. However, it contributes roughly 7% weight to AKAnomics’ models. BLS downward revisions were primarily to the new jobs created with roughly 200K out of 911K revision in the manufacturing and wholesale trade industries, most relevant for Industrials and Materials company analyses. The revisions to total work hours were far less (0.1%) within the manufacturing industry, and its impact to AKAnomics estimate revisions were hence minimal.

5.       Q&A

There were several questions from the audience that are summarized here. i) Are there any regional differences in the construction materials subsector? Construction materials companies tend to be domestically focused, and our data is national in nature, and we do not track regional differences; ii) Are Building products apart from HVAC, skewing to the downside? Data is suggesting that residential construction is slowing, while home improvement is holding up; iii) Other important data sources in the modeling? AKAnomics uses over 6000 data points, and over 100 sources. Other key data sources relate to the following releases in the major economies – Industrial Production, PPI, Import/Export, Commodity Prices/Volumes, Orders; iv) China deflation impact? China is roughly 5-10% exposure among the companies AKAnomics tracks. So China pricing is important, but has a small contribution. v) Electrical equipment downside – is it volume driven or price driven? Data shows growth slowdown in equipment volumes, electrical component orders, along with copper processing prices.