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Beleaguered or Blossoming?

| May 15, 2017

Allow us, for the moment, to set aside North Korea and Jim Comey and take a quick look under the hood at some interesting economic data. Specifically, after what seems like an interminably long wait, we may finally be seeing synchronized global growth for the first time in a few years.

With the first quarter of 2017 in the books, we are observing stronger data from most regions of the world, and particularly Europe, than was the case as recently as six months ago. According to Zacks Investment Research (an outfit that does a great job tracking such things), for the first time in nearly four years, none of the 19 Eurozone’s economies experienced deflation.

While we are not out of the woods yet, it appears that the skeptics just might be proved wrong, and the ECB’s exceptionally aggressive monetary policy will be effective in fending off the dreaded Japanese-style deflationary spiral that had investors around the world so concerned for the last few years. The European Commission’s economic-sentiment index is running at its highest level since 2011, and the unemployment rate in the euro currency bloc is at its lowest point since the global expansion got underway in 2009.

Just as importantly, global trade also reached a seven-year high, even as fears of a populist-led protectionist wave leading to a replay of the Smoot-Hawley disaster of the Depression era haunted the dreams of market strategists from New York to Hong Kong. Global trading centers such as Taiwan and South Korea are reporting solid activity.

No doubt, Trumpian rhetoric in opposition to NAFTA, the Trans-Pacific Partnership, and China’s trade surplus with the U.S. stoked those fears in the first place, but the president appears to have retreated slightly from those positions in his first few months in office. Fears of a trade war are subsiding, and confidence abroad is returning. Global manufacturing orders are growing at the fastest rate since 2014, an admittedly low bar to clear, but good news nonetheless.

Finally, a word (really, a few words) about the “beleaguered” domestic consumer. With well-known retail names slashing revenue and earnings outlooks, worries about the retail space in general and malls in particular are mounting (including for our hometown favorite – Nordstrom). Auto sales are slowing, auto loan delinquencies are rising, and student loans debt is a topic of conversation everywhere you turn in the financial press.

Significantly, the labor market here at home continues to improve, which is great news for workers and those who depend on them. At 4.4%, the headline unemployment rate is the lowest since 2007. We here at MPCA make it a point to keep track of “U-6” unemployment rate, which includes discouraged workers as well as part-timers who claim they’d prefer full-time jobs. At 8.6%, the U-6 is at its lowest since 2007.

Meanwhile, wages and salaries are up 5.5% in the past year, outstripping inflation. Meanwhile, consumer debt burdens are down. The Federal Reserve keeps track of the “financial obligations ratio,” which measures the share of after-tax income consumers need to meet monthly debt service payments plus regular (non-debt) payments such as renting a home, leasing a car, property taxes, and homeowners’ insurance. At 15.4% of after-tax income, these payments are near the lowest since the early 1980s.

While concerns remain about problems with retail spending and auto sales, we agree with those who advise taking a deeper dive into changing consumer habits, where there is an abundance of data pointing to a secular shift toward the internet, where sales are exploding and have been for some time. With device-driven online shopping and (often free) doorstep delivery, the consumer does not need billions more square feet of retail space. We will have more to say on that topic in future issues.

Have a great week.