The Economic Situation, June 2016

A Midyear Assessment

Near-zero GDP growth. Strong dollar. Weak exports. Factory recession. Fed hesitancy. Low inflation and low interest rates. Solid consumer spending. Accelerating construction. Rising home sales. China turning the corner? These keywords seen frequently in recent news stories pretty well describe the 2016 midyear economy.

The words reflect facts

About a year ago, in an effort to add some steam to the EU economy, the European Central Bank accelerated its euro printing press. Europe started printing money faster than America does, and that’s saying a lot! Ergo, the dollar got stronger and US exports fell. A US manufacturing recession kicked into gear. With manufacturing headed south, the Fed modified its intention to raise rates. Rates remained in the cellar, and apartment construction accelerated, but investment in capital goods went into hibernation. Refreshed by growth in the huge US services economy, stronger balance sheets, and cheap gasoline, consumers ramped up their demand for housing and automobiles. Sales of SUVs and pickup trucks hit new highs. Rents and housing prices headed north.

Along with all this, as the year progressed, China’s mammoth but slowing economy seemed to register a slightly stronger pulse rate, but not by enough to cause an increase in the prices of commodities that feed that giant economy. And then, in the midst of all this, it was still crazy season in America. Politicians running for the highest office in the land were saying ear-catching things, hoping to capture the attention of Twitter-constrained voters.

Things like free university education for all. Elimination of the IRS and the EPA. A Chinese wall around the US borders. Higher minimum wages. Punitive tariffs on all who ship more to the US than we ship back. The end of Obamacare, without offering an inkling of what might replace it. The signal to noise ratio was vanishingly small. With regime uncertainty headed skyward, “Let’s wait till after the election” became the mood of some investors.