29 Jan 2016 Reports Suggest A Slowdown
Evidence is mounting that the US economy is not immune to the contagion of the global economic slowdown. The Commerce Department announced today that the US economy expanded at an anemic (seasonally adjusted) 0.7% in the fourth quarter. This compares to advances of 2% in third quarter and 3.9% in second quarter of last year. Some argue that seasonal adjustments currently used by government statisticians do not reflect the evolving economy, but it’s hard to see how the economy escapes the downdrafts of global slowing, an unprecedented drop in oil prices and a surging dollar.
The Bank of Japan joined the European Central Bank yesterday in experimenting with negative interest rates to penalize commercial banks for not lending more aggressively. Other banks in Europe have followed suit. The Bank of Switzerland has set a minus 0.75% , Sweden, a minus 1.1%, and Denmark a minus 0.65%. The moves represent the dusty bottom of the barrel of options available to central banks to stimulate their slowing economies.
The Federal Reserve had gross domestic product numbers when they gathered and opted not to raise rates this week in their first meeting of the new year and since beginning their program of tightening monetary policy. It was widely expected they would hold rates steady this time as it was disclosed in their minutes from the last meeting that almost half of voting Fed governors were opposed to the increase. Falling oil and stock prices in early January only strengthened their position as they did for a smaller minority who fear, not inflation, but the specter of deflation, or falling prices.
The US dollar is once again near highs relative to the Euro and other global currencies. A strong dollar makes American exports more expensive, therefore less competitive, putting pressure on manufacturers here at home. The US manufacturing sector is only 12% of the economy, but it has been a steady buoying force since the financial crisis.
The US consumer, representing almost three quarters of the economy, remains resilient, but large market drops like this one has some impact. And while falling gasoline prices, low unemployment numbers, and relatively steady mortgage and re-fi rates offer strong support for confidence, a 5.1% tumble in durable goods, announced yesterday suggests consumers may be thinking twice about buying cars, appliances, and other items that last more than three years. The strong US dollar plays a significant role in hammering durables as well.
Business confidence was also seen to weaken in the durables report. As reported by the WSJ, orders for non-defense capital goods excluding aircraft fell 4.3% in December from the prior month. The category was down 3.9% in 2015 from a year earlier. The pullback on capital investments was the largest outside a recession since 2002. These numbers act as an early indicator of businesses’ confidence. Capital investments in particular are necessary to boost workers’ productivity and overall economic output in the longer run.
In their remarks this past Wednesday, Federal Reserve officials expressed new concerns about financial-market volatility and slow global economic growth. Last year they indicated they expected to increase rates four times this year. Their comments and new data argue against a rate hike in March. They said “the [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” It is possible they may have to lower their more sanguine December projections in March and later.
If the economy is indeed slowing, corporate earnings and expected stock market returns will be lower this year than in the last 6 years following the financial crisis. While we don’t bet your financial well-being on hunches about economic or market trends, this is a very good time to carefully evaluate the efficiency of your portfolio, eliminating as much as possible, the drag of expenses, taxes, and under-performance relative to the market’s returns. Given the rise of economic uncertainty we might also expect stock market volatility to continue higher than normal, making it very important to ensure that your portfolio carries no more risk (exposure to stocks and other risk assets) than is absolutely necessary to meet your life’s important goals.
Now is a great time to review your plan to ensure it accurately reflects every goal and priority you value. Together we’ll discover new opportunities while others worry needlessly about a multitude of things they cannot change.
