3/6/2019 Can The U.S. Economy Remain Strong In A Slowing Global Economy?

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Economy | Market Outlook

Can The U.S. Economy Remain Strong In A Slowing Global Economy?

Mar. 5, 2019 8:22 AM ET7 comments | 1 Like
by: Bang For The Buck

Summary

Europe is slowing significantly and there are few signs of a short-term rebound.

Asia Pacific is also suffering from a weaker Chinese economy.

The U.S. remains relatively strong, even though the trend is in decline and we keep
seeing some weaker economic data points.

Overview

Many regions globally have now started to show weak economic data. While the U.S.
economy remains relatively strong, we are seeing concerning statistics here as well. Is the
U.S. economy just lagging the global economy or can the strong data persist?

Europe
Italy is in a recession. Germany narrowly avoided a recession with a flat Q4 2018 GDP
growth, but could be in a recession if the latest GDP growth has a downward revision. The
poor economic data in Europe is well illustrated by the Euro Area Manufacturing PMI which
has gone from above 60 a little over a year ago to now below 50.

Figure 1 - Source: Euro Area Manufacturing PMI - TradingEconomics

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Asia Pacific

Japan has had lackluster growth with 2 out the last 4 quarters GDP growth being negative.
Manufacturing PMI is below 50 for both China and Japan.

China is the most important driver of economic growth in the region, but Chinese official
statistics should be viewed with some skepticism. South Korean and Japanese exports have
recently dropped significantly, which could be viewed as a sign that the Chinese economy is
weaker than many Chinese data points suggest.

Figure 2 - Source: TradingEconomics

The Australian housing market is another cause for concern in the region. Some regional
markets have been more extreme than others, but we are seeing reversals in many places.
Sydney and Melbourne house prices has dropped 10% and 9% over the last twelve months.
The impact of declining real estate prices can take some time to turn up in general economic
indicators. But when we see more significant real estate declines, it can very often take years
to regain the confidence, and the effect is almost always accompanied by a recession. If
house prices drop by another 5-10%, a recession would very likely follow.

Unemployment

One argument against a slowing economy is the unemployment data. It is true that the
unemployment rate is low for many countries compared to historical rates. However,
unemployment data often has a lag to other indicators, so if the economic weakness persists
or accelerates, it will likely turn up in the unemployment statistics in the not too distant future.

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Figure 3 - Source: TradingEconomics

USA

The U.S. came out with strong GDP growth of 2.6% for Q4 2018 during last week. While
earlier quarters in the year were stronger, I view 2.6% as very strong considering what is
happening in the rest of the world.

Both the Markit Manufacturing PMI and the ISM Manufacturing PMI came in slightly below
estimates. However, the numbers still look relatively strong in a global comparison for Markit
at 53.0 and ISM at 54.2. The negative trend is similar to many other countries though.

Figure 4 - Surce: Markit Manufacturing PMI - TradingEconomics

All U.S. economic indicators during the week were far from positive. Housing starts dropped
11.2% from the prior month and was the lowest number in over two years.

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Figure 5 - Source: TradingEconomics

The most bearish number was personal spending which had the biggest decline in the month
of December since the global financial crisis. I discussed the tighter lending standards and
lower demand for loans in a recent article which likely had an effect.

Figure 6 - Source: TradingEconomics

Conclusion
The global economy is slowing significantly. So far, the U.S. has remained relatively strong,
but we keep seeing weaker economic data points for the U.S. as well.

The big question is for how long can the U.S. economy remain strong in a slowing global
economy? Another question would be, who will bail out the economy this time around?

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While the U.S. have some ammunition available on the monetary side, I doubt much more can
be done on the fiscal side, given that the deficit is already at 5% of GDP. I also think there is
less global ammunition available. Europe can't lower interest rate much more and seem
unwilling to turn to more accommodating fiscal policies. Given the amount of debt in China, I
don't think it is realistic to expect China to bail out the world yet again. The next few months
will be interesting to say the least.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72
hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than
from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments (7)

EK1949
Let's consider the possibilities:

1) The U.S. is the principle engine of growth in the world. It's the biggest buyer, so it has the largest effect on
economies around the world that sell into it. The strength of the U.S. domestic economy is a bigger driver of
world growth than world growth is a driver of the U.S. economy.

2) The world is the principle driver of the U.S. domestic economy and when the world grows faster the U.S. does,
when world growth slows it slows in the U.S. too.

I see it as a balance of forces in both directions but in the aggregate 1) is still the stronger one.

In any case the best move is to optimize the domestic economy and not construe our own actions as predictions
about what someone else is doing.

05 Mar 2019, 09:50 AM

Bang For The Buck, Contributor

Author’s reply » Thanks EK1949. The U.S. is less export oriented compared to many other countries
and can avoid the full effect from the global economy, but it will still have some effect. Financial
conditions have tightened in the U.S., which has had an effect on capital intensive industries. So, the
slowing can come from within as well. Time will tell.

05 Mar 2019, 02:04 PM

chris8300
China and Europe are massively slowing
The brexit problem and the China trade war are both in limbo,suggesting many are waiting on the sidelines ,not
to mention the EU elections in may.
US economy shows signs of slowing ...The SP is near an all time high.
Indexes should head south for a while.(a retest of the december lows,for example)
P/E t hi h
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P/Es are too high

05 Mar 2019, 10:05 AM

Bang For The Buck, Contributor

Author’s reply » Thanks for the comment chris8300. The market has been a lot stronger in 2019 given
the economic data points, the next couple of months could likely define the direction for the year.

05 Mar 2019, 01:55 PM

Ben Gee
Is China slowing? In $ terms, Chinese growth is higher than ever.
At 6.6%, a $13T economy grew by $ 858B
A decade ago, a 11% growth to a $5T economy added only 550B.

05 Mar 2019, 11:42 AM

Bang For The Buck, Contributor

Author’s reply » I highly doubt China Annual GDP Growth is 6.4% as the latest quarter reads when auto
sales are double digits negative YoY and trading partners are slowing significantly.

05 Mar 2019, 02:13 PM

Ben Gee
Chinese export grew by 9.1% in January, retail sales grew by 8.5%.

06 Mar 2019, 06:07 AM

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