The U.S. economy remains a bright spot in the world despite significant headwinds that dampened activity in the early months of 2016. Manufacturing production has been consistent over the past four months, continuing to edge higher in the first quarter, boosted by strong automotive output. Yet a healthier economy and differing monetary policy opinion pieces also comes with a cost – a significantly strengthened U.S. Dollar – which in turn has continued to dampen the demand for export orders. Additionally, significantly lower oil prices have begun to negatively impact the U.S. oil renaissance. Low oil prices help the bottom line of those industries that are net purchasers but do little to result in additional hiring of new workers.
Employment and wage growth has spurred consumer spending and saving. Job openings are at a 15 year high and monthly job growth is running at its highest level since 2006. Manufacturers who support the consumer continue to gear up for anticipated future growth. Additionally, the construction industry continues to improve from year ago levels. Now that the construction industry as a whole has recovered to a more “normal” business cycle, we anticipate consumers will take advantage of the historically low mortgage rates.
International economies continue to pose a risk to the U.S. Europe is grappling with a number of issues. However, fiscal policy is becoming more supportive to growth, largely due to government expenditures associated with the inflow of asylum seekers in some member states. Also, measures taken by the European Central Bank ensure financing costs should remain low for a longer period of time. In worse shape are the Emerging Market economies. China’s growth is slowing down as they deal with issues arising from the move towards a more sustainable and consumption-driven growth model.
Overall, we see the continuation of a moderate consumer led recovery amid heightened global risks. Positive trends in the U.S. should provide the tailwind to support economic activity. However, global growth will 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, who represents almost 75% of the economy continues to improve. 1st quarter Retail Sales show year-over-year improvement around 2% on a month-over-month basis. Consumers continue to spend with good reason; more people are getting jobs, job openings are at their highest level in 15 years and consumers are seeing increasing disposable income via higher wages and lower oil/gas expenses. We will see the consumer pushing economic growth in 2016.
Wholesale Trade – Cloudy with a chance of rain. Wholesale Trade for the 12 months through January was down 3.8% compared to the year before. Internal trends indicate that decline will persist through the first half of 2016, before growth takes hold in the second half of the year.
Manufacturing – Mostly Sunny. Total Manufacturing grew 1.8% over the 12 months through February compared to the year before. Again, those segments that support the consumer are improving. On the other end, those segments that support the Oil and Gas and the Mining and Mineral Resource segments will continue to see contraction. All-in-all, manufacturing will flat-line into the end of the year.
Interest Rates – Cloudy with a chance of rain. Global uncertainty has muted any rise in the US Government Long-Term Treasury yields. They started the year at their highest level after the Fed raised the rate for the first time in over 5 years. They have since dropped and now hover around 2.4%. We expect interest rates to remain low until global markets stabilize.
Capital Goods New Orders – Rain. Capital Goods New Orders have decreased year-over-year for the past four months through February. Low commodity prices and the strong US Dollar are weighing on this metric. We do not expect improvement in this metric until we see commodity prices stabilize and the US Dollar weaken against other global currencies.
Construction – Sunny. In 2015, nonresidential construction exceeded expectations, even after an unusually severe winter in many parts of the country. We anticipate more of the same for 2016. Through February, Sales of new Single-Family homes were up 2% nationwide with groundbreaking for New Home Construction increasing 5.2% in February alone. Mortgage rates will continue to be favorable for the consumer and New Household Formations (kids moving out of Mom and Dad’s basement) will increase as wages improve.
International – Cloudy with a chance of rain. Growth is continuing at a moderate pace in Europe supported by a number of positive factors such as oil prices, the euro’s exchange rates and low financing costs which have stimulated exports and consumer spending. However, if continues to face headwinds. Specifically, the slowdown in emerging economies and the influx of refugees from the Middle East. We anticipate Europe will be able to overcome these risks and not go into recession.
China continues to see a slowdown in its economy. Developments have so far been consistent with a “rebalancing’ scenario where policy stimulus, combined with private consumption and services, counter balance recessionary developments. Volatility will continue however as its financial-markets evolve.
Other emerging markets continue to be exposed to financial exposure such as the US’s interest rate cycle and the USD’s appreciation and the sharp drop in a wide range of commodity prices. Growth prospects for Russia, Brazil and countries in the Middle East, Africa and Asia will continue to be subdued through 2016.