The U.S. economy continues to remain a bright spot in the world despite significant headwinds that dampened activity in the early months of 2016. The consumer is driving U.S. economic growth. According to recent Consumer Confidence reports, purchasers continue to view business and labor market conditions (i.e. personal income prospects) positively. They are cautiously optimistic about their prospects in the near term and this, in turn, is being reflected in the metrics we track. Retail Sales and Housing Construction continue to show strength as the consumer spends their hard-earned money.
The elephant in the room, however, is the uncertainty of the global economy. China, the world’s second-largest economy, continues to report conflicting economic reports. Retail Sales were broadly stable in the second quarter which is a positive. On the other hand, investment among state-sponsored companies soared while investment from private firms was weak, which raises questions about the numbers being reported.
Then consider the surprise decision by Great Britain to leave the European Union (aka Brexit). It is believed this will result in a slowdown in economic activity throughout Europe as companies postpone spending to assess the potential impacts and risks to their own economies. Emerging economies are expected to be impacted as well. Consider China. Although China has limited exposure to the U.K., what bilateral trade they do have, could be diminished.
Bottom line, we expect to see a substantial increase in economic, political and institutional uncertainty resulting in muted global growth through the end of 2016. If policy makers in the E.U. and the U.K. are able to engineer a smooth transition to post-Brexit trading and financial agreements (over the next year), then we would anticipate positive global growth going into 2018. That however, is quite distant in the future.
Overall, we see the U.S. consumer leading the way to global recovery … even amid heightened global risks. Positive trends in the U.S. should provide the tailwind to support economic activity. However, global growth will continue to be at its weakest point in the past five years.
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 – Sunny. The consumer is the engine of our economy and when times are good, the economy follows inline. For the third consecutive month, shoppers continued to spend, marking a strong end to the second quarter. It is clear, people are feeling more confident about the economy, the job market and their own financial stability. Year-over-year, Retail Sales are up 2.0%. We will see the consumer pushing economic growth through 2016 and into 2017.
Wholesale Trade – Cloudy. US businesses are taking a wait-and-see attitude as far as making any significant equipment purchases. As we reported last quarter, Wholesale Trade was lagging. With Great Britain now leaving the EU, we anticipate this trend will only continue until companies have time to assess the effect on the U.S. and Global economies. We now anticipate the downward trend in this metric to continue through the end of 2016. On a positive note, the housing market is strong. Wholesale Trade of Lumber and other Construction Material is up 5.4% year-over-year.
Manufacturing – Cloudy. The Brexit could negatively affect the manufacturing sector because companies may postpone business expansion plans. Up until the Brexit vote, Total Manufacturing Production us up 0.5% year-over-year through June. Due to global uncertainty, we believe the manufacturing sector will continue to tread water through the end of the year.
Interest Rates – Foggy. Brexit, U.S. Presidential elections …. All point to rates staying lower for longer. Long-term U.S. bond yields are now the lowest they have ever been in 63 years as U.S. Treasury bond and notes continue to act as the safe-haven investment in a world of uncertainty. The Fed continues to maintain the U.S. economy is stable and will therefore raise rates … at some point in the future. We expect interest rates to remain low until global markets stabilize.
Capital Goods New Orders – Rain. Once again, Capital Goods New Orders disappointed in the second quarter. They have now dropped three months in a row and are down 3.7% from year ago levels. With economic growth in key economies in question (China, Brazil, and the E.U.), investment in big-ticket items will continue to lag until we see commodity prices stabilize and the US Dollar weaken against other global currencies.
Construction – Sunny. 2016 is turning into the year of the builder. Through the first five months of the year, Total Housing Starts was up over 10% from the year ago period. Construction of single-family units was up 14% from year ago levels. Given that 15-year and 30-year mortgage rates are at their lowest levels in history (2.6% and 3.35%), the unemployment rate is below 5% and wages are increasing, we anticipate construction to continue to do well through the end of 2016.
International – Cloudy with a chance of rain. “Brexit” is the word. Prior to Brexit, the International Monetary Fund (IMF), an organization chartered with ensuring the stability of the international monetary system, was prepared to upgrade their outlook for 2016 to “better-than-expected” economic performance. Additionally, they were prepared to raise their 2017 forecast as well. Now, with the Brexit vote a done deal, the IMF stated there will be a substantial increase in economic, political, and institutional uncertainty. This resulted in them cutting their global economic forecast for 2017. As mentioned earlier, the ripple effect of the Brexit vote on other economies, specifically China and other emerging market countries, remains to be seen. As mentioned in last quarters economic report, a number of factors continue to influence the global economy. The positive factors include low commodity prices and Euro/USD exchange rate that helps foreign exporters. Negative factors include slowing emerging economies and the influx of refugees into the EU.