By: Christopher S. Rupkey, CFA, Managing Director and Chief Financial Economist, MUFG
With the increase in global financial market turmoil at the start of this year, there are questions about the direction and health of the U.S. economy. So what are the signs we can look at now to gauge the economy’s health?
The strength of the dollar both helps and hurts earnings overseas with approximately 50 percent of U.S. manufacturing companies exporting throughout the world. Behind the strength of the dollar and weakness in financial markets early this year are three basic factors: global economic outlook, China, and crude oil.
Global Economic Outlook
The U.S. economy is at full employment, so payroll job gains will be less this year. This means little for the economy or the well-being of consumers and companies, except fewer buyers with new paychecks will be able to purchase goods and services.
We do not see the same level of investment from U.S. companies as in previous recovery cycles. The question: can the economy go forward at a satisfactory pace without companies making those investments?
The U.S. economy is growing and yet many believe China’s slowing economy and currency uncertainty could have spillover effects here. This worry could be based less on economic factors and more on psychology. Sometimes consumers can get the wrong impression about the health of the economy, and such nervousness leads them to curtail their spending. The economic outlook is not as rosy as it was 12 to 18 months ago, but there are still strong indicators out there showing the economy will move forward this year at a moderate pace.
The Fed is looking to raise rates two more times this year and for the economy to grow from 2 to 2.5%. Unemployment in the Euro zone is above 10%, but continues to decline. The International Monetary Fund looks for around 3% growth for each of the next couple of years. China’s outlook is still at 6.5% growth. Many of the world economies look good, even if global markets can sometimes panic and trend lower temporarily.
Commodities Driven by China’s Infrastructure Growth:
The Boom and Bust Cycle
During a commodity boom, prices go up; on the bust side, prices go down. These days, we are feeling the effects of the bust side of the cycle. This cycle is implicitly tied to China’s rapid growth in the middle of the last decade. China was able to manufacture goods inexpensively, so the U.S. and other world manufacturers moved factories overseas. They helped Chinese manufacturers build the infrastructure to produce goods for export. There was a tremendous desire for natural resources like steel, iron ore, copper, and crude oil in China to set up this infrastructure to produce exports.
Today, China is not the same manufacturing powerhouse it once was and there is no longer the same demand for these natural resources. Global commodity prices are falling. Companies in countries like Brazil, Chile, and Peru are not able to sustain the revenues from the boom period, so economies in these countries are hurting.
All commodity booms and busts end however. Prices fall to such a low level that commodity manufacturers stop producing. Currently, we are waiting for the bust to hit bottom; we see signs that we are getting close to that point.
The Road Ahead
We see the typical economic cycle driven by interest rates and housing. With exports slowing, the domino effect will be felt throughout the supply chain. Because of market turmoil, many have second thoughts about the strength of the economy and outlook. The U.S. presidential election impact remains to be seen.
At this point, business leaders are cautious, without being overly pessimistic. There is business risk involved with planning, knowing that unforeseen factors can play on forecasts, so they are wisely proceeding with some caution.
Christopher S. Rupkey, CFA
Managing Director, Chief Financial Economist
MUFG Union Bank, N.A.
A graduate of the University of California, Berkeley, with an A.B. in Economics, Mr. Rupkey then received his M.A. in Economics from Columbia University in New York. Mr. Rupkey spent his early career working for Larry Kudlow at UBS Paine Webber, moving on to become Chief Economist at Cantor, Fitzgerald. At MUFG Union Bank, N.A., Mr. Rupkey is presently Managing Director and Chief Financial Economist in the Economic Research Group, focusing on financial markets, Federal Reserve policy and international economies including Japan. He has published the Financial Market Weekly for the bank for more than 20 years.
Mr. Rupkey is frequently quoted in the Wall Street Journal, Bloomberg News, Reuters, Yahoo, and other investor publications. From 2001-2002, Mr. Rupkey was President of the Money Marketeers of New York University, a club in New York made up of Wall Street dealers and New York Fed staff, and was President of the New York Association for Business Economics in 2009-2010. In September 2013, Mr. Rupkey was awarded the 2012-2013 National Association for Business Economics (NABE) Outlook Award. The annual award is presented to the NABE Outlook panelist with the most accurate economic forecast for the previous four quarters.
About MUFG Americas Holdings Corporation
Headquartered in New York, MUFG Americas Holdings Corporation is a financial holding company and bank holding company with total assets of $120.9 billion at March 31, 2016. Its principal subsidiary, MUFG Union Bank, N.A., provides an array of financial services to individuals, small businesses, middle-market companies, and major corporations. As of March 31, 2016, MUFG Union Bank, N.A. operated 370 branches, comprised primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York and Georgia, as well as two international offices. MUFG Americas Holdings Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., one of the world’s leading financial groups.
Visit www.mufgamericas.com for more information.
The views expressed in this report accurately reflect the personal views of Christopher S. Rupkey, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst’s compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein.
The information herein is provided for information purposes only, and is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Neither this nor any other communication prepared by MUFG Union Bank, N.A., (collectively with its various offices and affiliates “MUB”) or should be construed as investment advice, a recommendation to enter into a particular transaction or pursue a particular strategy, or any statement as to the likelihood that a particular transaction or strategy will be effective in light of your business objectives or operations. Before entering into any particular transaction, you are advised to obtain such independent financial, legal, accounting and other advice as may be appropriate under the circumstances. In any event, any decision to enter into a transaction will be yours alone, not based on information prepared or provided by MUB. MUB hereby disclaims any responsibility to you concerning the characterization or identification of terms, conditions, and legal or accounting or other issues or risks that may arise in connection with any particular transaction or business strategy. While MUB believes that any relevant factual statements herein and any assumptions on which information herein are based, are in each case accurate, MUB makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such statements or assumptions. Note that MUB may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth herein. Such other reports, if any, reflect the different assumptions, views and/or analytical methods of the analysts who prepared them, and MUB is under no obligation to ensure that such other reports are brought to your attention.
The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of MUB or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor MUB guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor MUFG shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.
©2016 Mitsubishi UFJ Financial Group, Inc. All rights reserved. The MUFG logo and name is a service mark of Mitsubishi UFJ Financial Group, Inc., and is used by MUFG Union Bank, N.A., with permission. Member FDIC.