Date: July 24, 2018
The U.S. Economy Deserves a Lot More Credit
The U.S. economy is rolling along with far better prospects for solid growth than is widely realized, despite the many distractions that abound. This suggests that the path of least resistance for the equity market is higher, even if the rise is punctuated by occasional downdrafts instigated by new political, trade or other developments. For the same reasons, interest rates are likely to work their way higher and the yield curve will continue to flatten, which shouldn’t be troubling. Disappointing economic reports pop up all the time, such as the modest gain in first-quarter gross domestic product. But that was neither unusual nor significant. The median estimate of economists surveyed by Bloomberg is for the government to say Friday that GDP rebounded to a 4 percent rate last quarter, the fastest since 2014, on the back of strong hiring trends, consumer spending, capital goods orders and numerous other items. These positive reports were presaged by another more forward-looking statistic on job openings that points to continued solid growth for as far ahead as we can reasonably see, which, admittedly, isn’t overly far. In fact, the Fed could determine that it needs to raise rates faster and higher than it currently projects if the data continues on its recent tear, especially in terms of the labor market. Fed Chairman Jerome Powell suggested last week that the Fed would continue to raise policy rates gradually “for now.” Some interpreted that to suggest it might need to stop boosting rates in the near future. Perhaps. But if inflation accelerates, the Fed might quickly conclude it must step up the pace and magnitude of rate hikes to prevent faster inflation from becoming entrenched in the economy. Like all economic statistics, monthly employment reports are subject to the normal ebbs and flows of data volatility, because the economy doesn’t grow in a straight line and estimates can be inaccurate. Hiring each month is based on randomized surveys that can vary widely from the underlying trend for one, two or even three months. Such volatility is subject to revision, but the corrective adjustments may come many months or even a full year later. It is dangerous to take each month’s data as gospel, especially when other data suggest otherwise.
It’s Getting Real: Euro-Area Growth Slows as Trade Fears Mount
Protectionism is starting to weigh on the euro area’s economy. Growth in the region softened in July on weaker new orders and deteriorating confidence, according to a survey published Tuesday. More worryingly, companies reported rising prices for raw materials, delivery delays and shortages, suggesting that tariffs — or the threat thereof — are already starting to disrupt global supply chains. The report from IHS Markit comes just days after a meeting of central bankers and finance ministers from the Group of 20 nations. They said that trade tensions are threatening global growth, echoing multiple warnings since U.S. President Donald Trump started a tit-for-tat tariff battle with China and the European Union. In China, concern has reached such a level that authorities on Monday unveiled a package of policies to boost domestic demand to cushion the economy from the fallout from the trade dispute. There’s also an inflationary impact, with companies raising prices to make up for the cost of the tariffs. Royal Philips NV Chief Executive Frans van Houten said this week that it’s difficult to estimate what future tariffs may mean but they will “have to be passed on” through higher prices. The euro-area composite Purchasing Managers Index for manufacturing and services fell to 54.3 in July from 54.9 in June, a sharper drop than economists had forecast. A measure of expectations fell to a 20-month low. “Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated,” said Chris Williamson, chief business economist at Markit. For manufacturers, the survey saw trade worries “intensify markedly,” he said.
China Unveils New Measures to Aid Growth Amid Trade Uncertainty
China unveiled a package of policies to boost domestic demand as trade tensions threaten to worsen the nation’s economic slowdown, sending stocks higher. From a tax cut aimed at fostering research spending to special bonds for infrastructure investment, the measures announced late Monday following a meeting of the State Council in Beijing are intended to form a more flexible response to “external uncertainties” than had been implied by budget tightening already in place for this year. Fiscal policy should now be “more proactive” and better coordinated with financial policy, according to the statement — a signal that the finance ministry will step up its contribution to supporting growth alongside the central bank. The People’s Bank of China has cut reserve ratios three times this year and unveiled a range of measures for the private sector and small businesses. With the economic impact of reciprocal tariffs on trade with the U.S. as yet unclear and no end to the trade dispute in sight, policy makers are pulling multiple levers to stabilize the economy. For now, that’s being done without resorting to large-scale stimulus or broad-based monetary easing, as officials remain committed to a multi-year campaign to curb debt growth. “I don’t think there is a significant easing or a policy U-turn; it’s more of a fine-tuning,” said Larry Hu, head of China economics at Macquarie Securities in Hong Kong. “Policy makers are sewing patches, offsetting the deleveraging drive that was too rapid and fierce.” The onshore yuan fell as much as 0.65 percent to 6.8295 per dollar, the lowest level since June 2017. Stocks in Shanghai and Hong Kong advanced. Nomura Holdings Inc. said the statement signals “the start of fiscal stimulus,” Guotai Junan Securities Co. said it “confirmed the easing bias in monetary policy,” and Deutsche Bank AG views it “as a confirmation of policy stance changing toward loosening.” Standard Chartered Bank Plc said policies will be slightly looser to support domestic demand but that there is no intention to introduce large stimulus.