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?
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
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.
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.
Figure 3 - Source: TradingEconomics
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.
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
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?
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.
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