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.

 Sunny 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.


 Mostly Sunny Whole­sale TradeCloudy.  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.


 Mostly Sunny 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.


 Foggy 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.


 Potential Rain 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.


 Sunny 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.


 Mostly Sunny  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.

To read oth­er eco­nom­ic updates please click here