Over the last several years the US economy has strengthened on the back of the consumer. Is it possible that very strength could hold back going forward?
Services and Manufacturing indexes have expanded consistently over the last year. Retail sales have continually expanded and the consumer has stood strong and provided the spark our economy needed to stand on its own as quantitative easing comes to a close. So with all of this how can the good news actually cause our own demise?
Okay, a bit of an overstatement, but there is a risk of moderation as exports should suffer in the 2nd half of 2014 (2H ’14). The strengthening of the US Dollar against the Yen and Euro are going to leave our exports more costly abroad. In sharp contrast to the US, inflation has been non-existent in Europe and artificially propped up in Japan. Strength in our economy has led to the dollar strengthening against its counterparts (Even England last week). These changes will move consumers of these countries away from US goods and towards other cheaper alternatives. Reduced demand will cause a slowdown in production of inventory and weaker profits.
Our trade balances continually run at a deficit; during Q2 ‘14 exports accounted for -3.2% participation of GDP[1]. This just means that the spread should widen in coming months as international consumers shy away from goods made in the US due to elevated costs. As drag increases on trade balances, Q3 GDP should soften slightly.
Economic data for the US was strong last week. Retail sales increased .6% in August showing continued consumer strength[2]. New US jobless claims rose to 315,000[3] giving further support to Federal Reserve action on interest rates staying at bay. Consumer confidence finished out the week rising to 84.6, beating expectations of 83.3[4].
International Data
Consumer prices in China increased 2% year over year[5]. Inflation in China has continually dropped over the last year. While 2% is normal for the US, this is the continuation of a disturbing trend as China continues to attempt to convert to a consumption based economy.
European markets celebrated positive data last week as Euro-zone industrial production increased by 1%, German trade balances came in positive 22.2B, France and Spain’s CPI month over month increased 0.5% and 0.2% respectively[6]. All encouraging, even with newly levied sanctions against Russia. Continued support from the European Central Bank will be necessary to keep the recovery on track.
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[1] www.jpmorganfunds.com
[2] www.investing.com
[3] www.mfs.com
[4] www.investing.com
[5] www.mfs.com
[6] www.investing.com