Despite what is often touted by official sources (and the Federal Reserve) as an economic “recovery,” there are plenty of signs in the U.S. and around the world that tell a very different story.
Economic Concerns Abound Abroad
We’ll begin by looking around the world economy. By most measures, economic conditions are actually worse in other parts of the globe than they are here. On the one hand, advanced economies like the European Union (EU) and Japan are struggling to remedy their prolonged lack of growth. At the same time, emerging markets elsewhere have largely gone from boom to bust even with a recent rebound. In both cases, political turmoil is another consequence.
These struggles are probably worse in Latin America and the former Soviet Union than anywhere else. Ironically, as Japan and the EU attempt to push the yen and the euro (respectively) lower and lower without success, countries like Venezuela are mired in the opposite scenario with a hyperinflation of their currency. As it stands, the euro has strengthened 8.5% against the dollar this year while the yen has performed much the same, gaining 12% against the greenback year-to-date. This hurts these country’s exports.
Even though some experts believe things appear to be “not so bad,” Citi points out that none of the problems that have plagued the global economy have been resolved yet:
- “The Chinese stabilization could be even more short-lived than we currently expect.” As we have noted, much of China’s growth has been reliant on an increasing pile of debt focused on their “old industry.” As the Citi team notes, this debt-fueled growth may not raise demand in any way.
- “One contributor to the potential stabilization in China’s and EM activity has been the weaker US dollar and receding expectations of a US rate hike.” The analysts think that the market may be under-pricing Fed rate hikes over the next two years. This in turn, would cause the dollar to become stronger, undercutting the recent emerging market rally.
- “A US downturn could threaten.” While most data has been decent recently, it is by no means burning up the charts. This makes the Citi team cautious and wondering if there is “more economic weakness to come.”
- “Political risks in Europe are high and rising.” Brexit (which the Citi team think has a 30-40% chance of “Leave” winning), the refugee crisis, elections in Spain, and extremist parties in a variety of European countries all are making the continent look a bit risky.
Reasons to Worry at Home
Closer to home, we often hear similar notions of the situation being “not too bad.” However, this is not what the underlying data actually tells us.
In fact, some of the Fed’s own published reports contradict the narrative of recovery: the Senior Loan Officer Opinion Survey conducted by the central bank indicates that financial institutions have been curtailing commercial real estate loans as well as more general commercial and industrial loans. These tightening lending conditions where banks are stingier with credit is not exactly a harbinger of an improving economic outlook. UBS analysts add that such circumstances also place strain on the labor market.
With Q1 growth in GDP a mere 0.1%, there are reasons to believe that the U.S. economy is actually grinding to a halt. The typically bullish banks Goldman Sachs and JPMorgan both agree that the data likely points to an impending downturn for the U.S. Even if we aren’t in store for a devastating recession, it’s probably a safe bet that economic conditions are still going to get worse before they get better.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.