When real GDP came out on Friday showing that it was weighed down by a wider trade deficit, there was some concern that the global economic slowdown is starting to depress the US economy. In fact, real exports of goods and services rose 2.0% y/y to a record high during Q4-2014. However, real imports rose faster, by 5.3% y/y, also to a record high. Exports suggest that the global economy continues to grow, albeit at a slow pace. The US economy is performing well, as confirmed by the increasing demand for imports.
So while the widespread concern has been that the global economy will drag down the US, it is also possible that the US economy will boost the rest of the world. Instead of the US decoupling, the rest of the world might benefit by being coupled with the US economy. While exports have become more important to the US, they still account for only 13.2% of nominal GDP, up from 10.1% twenty years ago.
Nevertheless, also weighing on the US economy is the sharp drop in the global price of oil and the strength of the dollar. Both are depressing corporate profits of energy and multinational companies. Some of these companies are responding by cutting capital spending and paring their payrolls.
It’s too soon to be sure about the magnitude of these cuts. Nevertheless, nondefense capital goods orders excluding aircraft fell 3.5% during the final four months of 2014. This series is very volatile on a monthly basis. However, it is highly correlated with S&P 500 forward earnings, which has been falling since October 10, dragged down by earnings of the Energy sector.
Much of the recent weakness in capital goods orders has been for machinery, particularly construction and industrial equipment. The former may be related to the recession in the oil patch. The latter may be attributable to a pause in the US manufacturing renaissance as the strong dollar reduces America’s competitive advantage.
Today's Morning Briefing: Gwyneth’s World. (1) “Conscious uncoupling.” (2) Will the US, the Fed, and Greece decouple this year? (3) US exports still growing. (4) Will US imports save the world? (5) US bond yields brought down by gravitational pull of near-zero German and Japanese yields. (6) Chinese just want to have fun too. (7) US profits coupled to oil price and the dollar. (8) Emerging markets decoupling from commodity prices and the dollar. (9) Stocks love easy central bankers. (10) Can Islam decouple from jihadists? (More for subscribers.)
So while the widespread concern has been that the global economy will drag down the US, it is also possible that the US economy will boost the rest of the world. Instead of the US decoupling, the rest of the world might benefit by being coupled with the US economy. While exports have become more important to the US, they still account for only 13.2% of nominal GDP, up from 10.1% twenty years ago.
Nevertheless, also weighing on the US economy is the sharp drop in the global price of oil and the strength of the dollar. Both are depressing corporate profits of energy and multinational companies. Some of these companies are responding by cutting capital spending and paring their payrolls.
It’s too soon to be sure about the magnitude of these cuts. Nevertheless, nondefense capital goods orders excluding aircraft fell 3.5% during the final four months of 2014. This series is very volatile on a monthly basis. However, it is highly correlated with S&P 500 forward earnings, which has been falling since October 10, dragged down by earnings of the Energy sector.
Much of the recent weakness in capital goods orders has been for machinery, particularly construction and industrial equipment. The former may be related to the recession in the oil patch. The latter may be attributable to a pause in the US manufacturing renaissance as the strong dollar reduces America’s competitive advantage.
Today's Morning Briefing: Gwyneth’s World. (1) “Conscious uncoupling.” (2) Will the US, the Fed, and Greece decouple this year? (3) US exports still growing. (4) Will US imports save the world? (5) US bond yields brought down by gravitational pull of near-zero German and Japanese yields. (6) Chinese just want to have fun too. (7) US profits coupled to oil price and the dollar. (8) Emerging markets decoupling from commodity prices and the dollar. (9) Stocks love easy central bankers. (10) Can Islam decouple from jihadists? (More for subscribers.)
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