Global Economic Slowdown – Implications For US Stocks by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

August 11, 2015

IN THIS ISSUE:

  1. Another Ho-Hum Unemployment Report For July
  2. The Global Economy is Slowing – Implications For the US
  3. Policymakers Have Few Options to Spur Economic Growth
  4. The Latest Implications For the US Equity Markets
  5. The Costly Truth About the New Obama Energy Plan
  6. Dodd-Frank Turns Five – Still A Very Bad Law

Overview

The global economy is rolling over to the downside for the most part. The question is, will this global slowdown take the US economy down with it? While no one knows for sure, that possibility simply cannot be ruled out. If the softening in the global economy leads to a slowdown in the US, that will almost certainly result in a weakening of our stock markets.

In my March 17 E-Letter, I recommended that investors in traditional “buy-and-hold” equity funds reduce stock market exposure (or hedge long positions partially or fully) due to increasing global risks at that time. I repeated that recommendation twice since then.

Since March 17, the S&P 500 Index has moved sideways to lower as of this writing. Could the US equity markets be setting up for a significant downward correction? It would be unwise in my opinion to rule it out.

The slowdown in the global economy and the implications for the US economy and our stock markets will be our main topic for today, but before we get to that, let’s take a quick look at last Friday’s unemployment report for July.

At the end of today’s letter, I will briefly comment on Obama’s new Clean Energy Plan which will raise electricity costs significantly, if enacted, and give you a link to the full story. I will also comment further on the Dodd-Frank law I wrote about in my Blog last Thursday.

Another Ho-Hum Unemployment Report For July

On Friday, the Bureau of Labor Statistics announced that 215,000 new jobs were created in July. It also announced that the official unemployment rate remained at 5.3%. The 215,000 jobs gain was about what Wall Street expected, but it was well below the number of jobs created in May and June – so call it mediocre.

Digging down in the report, the Labor Force Participation Rate was unchanged at 62.6%, which remains at a 37¹/? year low. Average hourly earnings ticked up only 0.2%, or about 5 cents, to $24.99, and are up only 2.1% over the last 12 months. Among the hottest job categories last month were retail jobs (+36,000), healthcare (+28,000) and food service and bars (+29,000).

The fact that the July unemployment report was just so-so stimulated even more speculation regarding whether the Fed will hike the Fed Funds rate at the September 16-17 policy meeting. That decision could well depend on how the August unemployment report looks – which will be released on September 4.

August traditionally is not among the best months for job creation and it could be lower than July’s results, which would mean that new job growth will have declined for four months in a row. If that proves true, then the question is whether the Fed would hike anyway or push “liftoff” to the December policy meeting. Of course, there’s no way to know.

Finally, here’s a new economic indicator that should concern us. The Federal Reserve Bank of Atlanta has devised a new measurement of GDP this year that’s proved quite accurate so far. While most economists expect 3Q GDP to rise around 3%, the Atlanta Fed’s GDPNow forecast is only at 1% as of last week. Hopefully, this weekly indicator will improve soon. I’ll keep an eye on it.

The Global Economy is Slowing – Implications For the US

On the surface, the domestic economic landscape looks fairly benign. The US economy recovered in the 2Q with an initial GDP estimate of +2.3% (annual rate) following an upwardly revised +0.6% in the 1Q. The jobs market and the housing markets continue to improve rather steadily.

Consumer confidence, although down somewhat in the last few monthly readings, is still sharply higher since the late recession readings in early 2009. Consumer spending rose at an annual rate of 2.9% in the 2Q, up from 1.8% in the 1Q. All in all not great, but certainly not bad.

Global Economic Slowdown US Stocks

Globally, however, things are not so benign. The International Monetary Fund (IMF) projects global economic growth of 3.3% for this year, but that number now looks optimistic. In the 1Q, for example, the IMF reported that global growth came in at only 2.2% (annual rate), well below its forecast.

The 1Q shortfall, the IMF said, reflected an unexpected output contraction in the United States, with attendant spillovers to Canada and Mexico. One-off factors, notably harsh winter weather and port closures, as well as a strong downsizing of capital expenditures in the oil sector contributed to weakening US activity.

In Japan, despite a near 40% drop in the yen, industrial production is growing at just a 2% annual rate. Inflation is only at 0.4% year-over-year. The International Monetary Fund recently warned Tokyo that its debts are unsustainable and set to reach 300% of GDP by 2030.

In China, the PMI manufacturing activity index dropped to 47.8 in July, down from 49.4 in June, well below the neutral 50.0 mark for the fifth month in a row. Chinese factories are suffering their deepest contraction in activity since July 2013. Renewed declines in new work orders and new export orders have resulted in production being cut at its fastest rate since November 2011. Purchasing activity is falling at the fastest rate since January 2012.

The slowdown in China is clearly affecting the surrounding Asian economies. Singapore, Taiwan and South Korea are suffering industrial production contractions of 4.9%, 1.9% and 1.6%,  respectively, on a year-over-year basis.

In Europe, despite aggressive QE efforts by the European Central Bank, lending activity remains tepid, and core inflation remains well below target at only a 1% annual rate.  In Latin America, Brazil’s economy is plunging and Argentina and Mexico are also weak, with the Mexican peso plunging to a new low against the US dollar.

According to the IMF, global growth is set to slow this year to its weakest pace since the financial crisis, as mounting threats from China to the eurozone add to a long list of forces restraining the world economy. Last month, the IMF’s Chief Economist Oliver Blanchard concluded: “We have entered a period of low growth.”

While the IMF for now still expects global growth to pick up again next year, the current bouts of turmoil underscore the fragility in the world’s economy, where anemic output in one region risks dragging down others across the globe.

Policymakers Have Few Options to Spur Economic Growth

Policymakers have fewer options left to respond to downside surprises with interest rates near zero, the IMF said. Likewise, the IMF noted that governments have pushed debt to dangerously high levels and central banks are constrained by the lower limits of rate reductions.

Weak growth, mountains of debt, stubbornly high unemployment and limited policy options are setting the stage for more market volatility ahead, including in China. “The post-crisis world is one of high

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