The U.S. economy, though soft in the second half of 2015, remains a bright spot in the world. This is despite significant headwinds created by the problems facing the majority the globe’s economies. The world’s largest economy is being bolstered by gains in Consumer Spending and Construction. Strong employment growth, cheaper gasoline, and higher home prices will probably sustain consumer confidence and spending. Given that Consumer Spending accounts for almost 71% of U.S. Gross Domestic Product, it is reasonable to believe the U.S. economy will overcome any fallout from the rout in commodities, frantic swings in global financial markets and global economic weakness.
Internationally, “Quantitative Easing” continues to be the catch phrase. The European Central bank now plans on “doing whatever it takes” to stimulate growth. This is the same story from a year ago when the ECB introduced the European version of QE. Again, while we anticipate this being positive over the short term, we question what the long term consequences will be. Its benchmark interest rate sits at 0.05% and the rate on deposits it holds is a negative 0.3%, considered a penalty rate intended to encourage banks to lend rather than hoard cash. Additionally, China is struggling with declining growth. GDP is now 6.8% and the trend has been negative for several years now. The government continues to discuss additional QE plans to reverse the trend.
All in all, the future of the global economy continues to be cloudy. In the near term, we anticipate the U.S. economy to push through the current slowdown and improve through the first half of 2015 and act as the global economic shock absorber. However, if the Eurozone, China and Emerging Market economies continue to deteriorate, the U.S. economic recovery could be at risk.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Retail Sales – Mostly Sunny. Slow but steady growth was the trend throughout 2015. Total retail sales are up an annualized 4.8%. Consumers continue to spend with good reason; more people are getting jobs, job openings are at their highest level in 16 years and consumers are seeing increasing disposable income via higher wages and lower oil/gas expenses. Where businesses pushed the economy in 2014, we see the consumer pushing economic growth in 2016.
Wholesale Trade – Cloudy with a chance of rain. Businesses continue to pull back. The U.S. Census Bureau announced that November 2015 sales of Merchant Wholesalers down 4.6% year-over-year, sales of Durable Goods were down 1.8% and sales of Non-durable Goods were down 7.2% year-over-year. Merchant Wholesale Inventories fell 0.3% to one of their lowest points since 2009. One positive, Wholesale Trade of Machinery rose 2.3%. Overall, the report confirmed the weakness in Wholesale Trade throughout 2015.
Countering this is a forecast issued by the Business Survey Committee of the ISM which expects economic growth to improve in 2016. Capital Expenditures are expected to increase by 7.5%, employment is expected to improve by 1.7% and Revenues are expected to increase to across the board.
Manufacturing – Cloudy. Global challenges have taken a toll on manufacturers in the US. The US Dollar continues to be strong which in turn is reducing demand for exports. Exports are down 6.4% year-to-date and trade volumes remain soft. Mining, which makes up about 16% of US Industrial Production, and Utilities, which make up about 10%, are both soft as well. Mining is down because of the slowdown in the sector. Utilities are down because the weather has been warmer due to the El Nino effect which in turn has decreased energy consumption. Even with all of the challenges, Manufacturing during the 4th quarter is up 1.2% from 2014Q4. Even taking out the automotive sector, which has been on fire in 2015, Manufacturing is still up 0.7% quarter-over-quarter.
Interest Rates – Cloudy with a chance of rain. Even with a quarter of a percent increase in the funds rate, the Federal Reserve continues to be accommodative. Inflation is practically non-existent and, with commodity prices continuing to show weakness, will remain so through at least mid-2016. Inflation is being seen in two areas however. Medical Care, where costs anticipated too increase from 3.0% in 2015 to 3.4% in 2016 and Housing/Lodging, where inflation is expected to increase from 3.2% to 3.5%.
We anticipate the Fed will continue raise rates only as economic conditions and inflation improve … which will not be until after commodity prices have increased from their current, historical lows. We anticipate interest rates being low for longer.
Capital Goods New Orders – Cloudy with a chance of rain. This metric is walking in step with that of Wholesale Trade. Business-to-business activity is down 9.4% year-over-year. The primary driver for this is the weakness seen in commodities. The weakness in commodities however affects the metrics associated specifically with mining equipment; Mining Machinery New Orders (down over 34% YOY) had over-sized influence on the overall metric. Taking this component out of the mix, Non-defense Capital Goods New Orders was down only 2.4% YOY which is considered milder than normal. Given the positive news out of Consumer Spending, we anticipate this improving in 2016.
Construction – Mostly sunny. Housing starts and permits were mixed in the latest report. Housing Starts fell 2.5% and permits fell 3.9%. Year-over-year though, rates looks healthy especially for permits which rose 14.4% while starts are up 6.4%. In addition, Homes Under Construction are up 18.5% on a year-over-year rate. This in turn has resulted in a sizable boost to construction spending and employment.
Nonresidential Construction Spending is expected to continue to recover. The Associated Builders and Contractors forecast Nonresidential Construction to increase 7.4% in 2016, along with improvements in employment growth and backlog. Interestingly, the greatest expected construction growth is expected to be in the manufacturing sector (14.9% increase), a sector which is showing considerable weakness. The Lodging construction is expected to grow by 11.4%, clearly in anticipation of an increase in consumer spending.
International – Cloudy with a chance of rain. Overall, major global economies are struggling with weakness in their economies. The good news out of the Eurozone is that overall employment is at a 4 ½ year high and order backlogs showed the sharpest increase since May 2011. German economic sentiment increased in the last quarter but is still considerably off April’s high and expectations remain dampened overall. The primary reason cited are the continued weakness in China and increasing concern about the outlook for emerging markets.
Speaking of China, fourth quarter GDP was up 6.8% from a year ago coming in at 6.9% … its slowest pace since 1990. This in turn has led to corrections in financial markets around the world as analyst’s see a China slowdown as potentially affecting other economies. In general, economists widely agree that China’s maximum potential growth is slowing due to demographics (an aging population) and
urbanization (trend away from an agricultural economy). Additionally, other Emerging Markets are seeing weakness as well. The end of 2015 saw the downturn in manufacturing continue; with PMI indices for India, Brazil, Russia, Indonesia, and Malaysia all in contraction territory. Clearly, many of these countries are being impacted by the weak commodity prices.
The World Bank, however has estimated 2016 global growth will climb to 2.9% in 2016 from 2.4% in 2015 based on their belief that advanced economies, the U.S. and to a lesser extent the Eurozone, will improve through 2016.