Economies around the world are catching an economic cold – feeling sluggish and a bit green around the gills. Is it contagious? Will the US economy catch whatever is going around?
Probably not. History shows that while the US can lead the world into recession, America does not get dragged into dramatic downturns.
There is no question that economies around the world are slowing down. It’s happening in China, the European Union, and Canada. South Korea just reported the sharpest drop on exports since 2016 and three straight months of declines. German manufacturing recently slipped into contraction mode with a PMI down to the 47 range. Below 50 signals economic contraction.
The US-China trade spate is responsible for some of the global slowdown. Reduced consumption and economic growth, in general, can take a toll on export-heavy countries, such as yep, China, South Korea, and Germany. Uncertainty surrounding the when-and-how of Britain’s exit from the EU in Brexit has had a further negative impact on Europe. Italy is already in a recession, France is struggling.
None of this is good for the US economy. But a look at 40 years of data shows that the American economy marches to the beat of its own drum. Over the past four decades, a global slowdown has never pulled the US into recession.
Why? Consumption. Almost 70% of America’s Gross Domestic Product comes from consumer spending. We’ve been a net importer for decades. Global economic turmoil has little impact on our primary economic driver – people buying stuff. In those times when our imports do go down, that reduction actually boosts US GDP by reducing our net export deficit while inflicting pain on our export-heavy trading partners.
Indeed, when the US catches a cold, the world economy often catches pneumonia. An American recession has sent the world economy into a tailspin four times in the past 43 years – 1975, 1982, 1991 and 2009.
Again, as disconcerting it is to watch Germany and China and South Korea struggle, their problems don’t predict recession here in the US. The only economic data that matters to the US economy is American data.
So, what does the data about our economy say about the near-term future? The “coincident data,” meaning figures for what is happening right now is so-so. Retail sales, industrial production, manufacturing sales, housing starts, auto sales, home sales are middling. Not awful, but not highly expansionary. For example, housing starts in February were lower — about 1.1 million, down from an earlier 1.2 million annual pace. Anything over 1 million is still a healthy number, but lower is lower. US manufacturing’s PMI recently dropped to an 18-month low of 53. But that number is still well in the expansion zone – just expanding at a slower pace.
The luke-warmness of this data has convinced the Federal Reserve to ease up on interest rate hikes thus giving the markets some relief.
The leading economic data has been improving. Manufacturing orders, consumer confidence, and new housing permits have been stable or improving. Consumer confidence has benefitted from the end of the government shut down, the rollout of tax refunds and the end (for now) of the artic-cold weather caused by the Polar Vortex!
Employment also looks good. Non-farm jobs increased over 300k in January. The unemployment rate is at 4.0%. Average hourly earnings are pacing at 3.2% growth for the year – well below the 4% that can help trigger a contraction.
That all adds up to a very positive check-up for the US economy. We’re in good shape, humming along safely insulated from the economic bug that has other countries feeling poorly.
