How healthy is the US economy?
During the first half of 2019 the US economy grew by just over 2.5% in real terms, slightly ahead of typical estimates for the economy’s potential growth rate of 1.9%. At the same time, the labour market continued to create new jobs with the unemployment rate remaining low at 3.7%.
However, while consumer spending has been rising at a strong pace, business fixed investment and exports have weakened.
Household incomes have been supported by gradually increasing wage gains and high levels of employment, combined with on-going improvements in consumer balance sheets, according to surveys by the New York Federal Reserve.
The main drivers here are rising home prices, rising equity prices and diminishing indebtedness relative to income.
Consumer finances
The strength of consumer finances is an important reason for confidence that the current business cycle expansion can continue for at least another couple of years, in contrast to the leveraged condition of households immediately prior to the financial crisis of 2008-09.
In a broad sense, consumers have been gaining at the expense of businesses, as often happens in the second half of a business cycle expansion.
Corporate profits
US businesses appear to have passed peak profitability for this cycle. While profits have still been rising, margins have narrowed, and the strength of the dollar has crimped overseas earnings.
In the same vein, core capital goods shipments, a lead indicator for business investment, appear to have reached a plateau, and new export orders (from the Purchasing Managers’ Index) have been weakening.
Housing continues to make progress, aided by declines in mortgage rates. Again, housing is a lead indicator for numerous business sectors and is therefore encouraging for employment and for the purchases of a range of raw materials from timber to copper and steel.
The Conference Board’s measure of business confidence remains at or close to its high for the cycle.
Further expansion expected
All these indicators suggest that business is not in bad shape but has undoubtedly been derailed somewhat by the global slowdown in manufacturing. We expect the current US business cycle expansion to continue without overheating or being inflationary.
European Central Bank – dissent in the ranks
Draghi’s last meeting
The decision by the European Central Bank (ECB) on 12 September – at Mario Draghi’s last meeting as President of the Governing Council – to resume asset purchases of sovereign bonds at a rate of €20 billion per month (Quantitative Easing-QE) and to cut the interest rate was not welcomed by the heads of the German, Dutch, French and Austrian central banks.
Poor design
Previous episodes of QE by the ECB have been a failure largely because they have been poorly designed. If they had been designed to acquire securities from non-banks this would have raised the rate of growth in the money supply in the eurozone much more quickly and to a faster growth rate. This in turn would have increased spending growth across the eurozone and there would have been no need to resume QE purchases.
Instead, the ECB has decided to resume the same policy with the same failed methodology – buying securities from banks – which is likely to absorb substantial amounts of sovereign debt, essentially in an asset swap with the banks, without creating new deposits in the hands of firms and households, but only on the books of the ECB itself.
Weak growth environment
Therefore, the growth in the ‘money supply’ will likely continue to be too low and the eurozone is likely to remain in its self-induced weak growth environment, low inflation, and negative interest rate trap.
How is UK business investment faring amid Brexit uncertainty?
Brexit saga
The Brexit saga continues to dominate political debate in the UK while having negative effects on economic growth by maintaining a high level of “regime uncertainty” – a lack of clarity about the rules, regulations, tariffs, and competitive position of firms after the country transitions to its new relationship with the European Union.
The fluctuations in the Brexit debate continue to be reflected in two key areas: the foreign exchange market for sterling and the domestic investment scene. Elsewhere, such as in the labour market, in personal consumption spending, or in inflation trends the UK economy has continued to perform much as it did before the referendum of June 2016.
Downturn
The downturn in capital expenditures by businesses is abundantly clear. Unfortunately, these trends seem unlikely to change much until after the political and trading relationships between the UK and the EU are well on the way to resolution.
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