Italian bond yields, the Chinese yuan, emerging markets and the prospect of trade war have dominated the financial news cycle for the past month. The one constant in the world outlook, in the consensus view, is the strong US economy. Second quarter US GDP growth is forecast at 2.87% by the New York Federal Reserve’s “Nowcast” model and at a blistering 4.5% by the Atlanta Federal Reserve’s “GDPNow” model, based on economic reports to date.
That idea also has filtered into the US administration. Donald Trump’s economic adviser Larry Kudlow said June 28, “I believe China is operating from a greater position of weakness than folks think, and we are operating from a greater position of economic strength.” That is dangerous thinking; wars start when one side overestimates its strength and underestimates the strength of a prospective adversary.
The best place to look for trouble is where no-one expects it. The US consumer is the biggest source of demand in the world economy, and real personal spending came in unchanged in May, against a consensus forecast for a 0.2% monthly gain (equivalent to a 2.4% annual rate of increase). There’s a simple explanation for the disappointing consumer report, and that is the rising oil price. Consumer budgets are so stretched that a few cents more per gallon at the pump translates into reduced spending on other items.
The stock market shows a similar inverse relationship between consumer staples stocks and energy stocks during 2018 to date.
Consumer confidence has soared on the strength of the Trump tax cuts, to the point that US households are spending virtually all of their income. Personal savings have fallen to barely 2% of disposable income, a level not seen since just before the Global Financial Crisis of 2008.
But in 2007 US consumers had a decade of 10% annual gains in home prices behind them, and borrowed freely against home equity for spending. They don’t have that kind of home equity buffer today.
Meanwhile, real US hourly wages haven’t budged for a year, despite a very low unemployment rate.
As the impact of the tax cuts wears off and high energy prices persist, US GDP growth could fall well below the first quarter’s 2% annual rate.
China, by contrast, shows steady growth. The most comprehensive big data analytics point to a strong June. Union Bank of Switzerland analyst Ajit Agrawal, who manages the bank’s Evidence Lab, wrote earlier this week:
“Our preliminary big data analysis for China’s economic activities suggests June growth remains strong, with improvements over May in industrial production, property sales, and property investment. We spot some softness in consumption, but not by much. Auto sales growth looks soft but driven by fewer business days over last year. Given the strength of our monthly signals this quarter, we expect Q2 economic growth to be higher than Q1, and above consensus expectations. This analysis from UBS Evidence Lab Macro team uses high-frequency data gathered bottom-up from different segments of the economy.”
China has eased monetary policy, which requires some depreciation of the RMB against the US dollar. The usual suspects are now warning of capital outflows from China on the scale of 2015 and a sharp weakening of RMB. Those forecasts are based on a misunderstanding: as the Bank for International Settlements explained in its First Quarter 2016 report, the “outflows” of 2015-2016 came about when Chinese nonfinancial corporations paid down foreign debt and substituted domestic debt. The perpetually rising RMB had made it advantageous for Chinese firms to borrow in dollars and pay them back with stronger RMB, and that game came to an end in August 2015.
China’s central bank lost about US$1 trillion of reserves and Chinese corporations reduced their foreign debt by roughly the same amount. The reorganization of China’s balance sheet produced some temporary shocks. By contrast, the price of Chinese risk is very low today. Implied volatility on 3-month options on the RMB-US dollar exchange rate jumped to 10% in early 2016; today it trades around 5%, in the middle of its one-year trading range. And the cost of insurance against Chinese sovereign default over the next five years is a fraction of what it was in 2015, and around the lowest on record.
Micheal Chen, You are misunderstanding macroeconomics, Money is Debt, all money is borrowed, stop inciting chaos
Being an experienced sailor he knows how to steer clear of sunami!
Many lucid people will agree with you. But the neo-cons would think that you said this because your country is afraid of the US and wants to gain an advantage over the US militarily.
Sonny Azhak
1. Standard of living vs quality of living are not synonymous
2. If outsourcing is that good, why is Trump complaining?
3. Best schools and universities are giving out degrees without education. Education is an industry now.
4. “produce some innovative products”. That requires knowledge and skills.
5.Your attitude towards the “American poor”, is, to say the least, pathetic. Obviously, you are not an American poor. I bet you are not even an America.,
Sonny Azhak, are you saying the American poor deserves to suffer like the untouchables in Inida? Indian’s inhumane caste system abuses human beings by birth, and Indians do not have sense of human rights, equality, liberty and man’s nature right, but the American is supposed to be the final form of civlization, democracy, equality and liberty are the nature right of the Americans, are you saying the American lies, all those high ideals claimed by the American as their birth right are fake news, and it is the American’s wet dream?
This was what Obama started. But the Deep State and Trump camp don’t seem to be convinced they are done yet. （They need to dig a deeper grave for bury themselves and their children)
Sonny Azhak
Your argument about global economics is a false one and only adopted and accepted by colonial mindsets. The true globalisation is to produce where it is the most competitively produced and every one wins. And most importantly, this process is natural and on one can beat it.
Sonny Azhak True but its changing with Chinese innovation and rising middle class!
Falk Rovik US Debt driven consumers spending helps the Crporations to control the masses!
There is a slight problem with your economic arguments. America’s standard of living is higher than China…so manufacturing low-end stuff that the latter produces is not recommended for American blue-collar workers – hence, it made sense for US companies to outsource those jobs to China where workers could be paid very low wages while keeping the masses in employment…lest they riot! Globalisation has made sure that products’ components can be outsourced to low-cots countries while the big bucks (in marketing, design and innovation) stays in America!
The argument for more investment in secondary education for poor americans might hold water….but middle-class Americans already go to some of the best schools and Universities anyway!
So, what the Americans need to do is produce some innovative products up the value chain that the world wants – after all, the majority of high-tech products and companies for the past 30+ years have been American! So, American graduates need to be herded into the high-tech industries of the future.
As for the American poor, well, they have no future…unless a miracle happens!
The US is owned by finance capital. It imposes a huge "tax" on all economic activity in various forms of economic rent. The biggest tax of all is the rent of housing, whether it is stricly regarded as rent or as payments on a mortgage note. It still amounts to paying rent on money created by commercial banks out of thin air. Read Michael Hudson’s work on the subject. "J is for Junk Economics"
good
WOW———-and now for all to see——–Mr Goldman is a EXPERT on the economy and the American Consumer. What a GUY!!
Mr. Goldman’s facts and figures are correct, but we must keep in mind the US Growth is funded by a trillion-dollar deficit.
Furthermore, the savings rate among the 90% poorest Americans is only ONE dollar a year!! Not enough to meet a rainy day, or the increased inflation and rising interest rates that will follow as a consequent sanctions and tariffs. The needed reforms in pension and medical care will hit the poorest 90% very hard, most of them is only one paycheck from poverty already.
President Trump must change US strategies from destroying other nations to rebuilding America. PUT AMERICA FIRST!
Get US soldiers out of Afghanistan, Syria, and Iraq. Close bases and reduce the funding for foreign covert operations and regime changes.
You are right, but Americans are not among the smartest country in the World. USA is not even among the first 25 countries in the World in terms of the average IQ of the population. Furthermore, military spending has become such a sacrosanct activity that USA would prefer to do away with the office of the POTUS than to reduce the military budget by one dollar.
The strength of an economy is its ability to produce quality at acceptable cost, and make a decent profit by selling it at a level the market can afford. Efficiency depends upon the skill and knowledge of the producers.
American economy fails on each of the counts mentioned – unable to produce goods that the American poor can afford. Not everyone can be a Costco customer despite the volume discounts.
The 2 reasons for the decline of American industry:
1. Low investment in education, especially at school level that now outputs youth that can neither read nor count, abilities a must for the present knowledge-based world economy.
2. Inability to implenent Asia’s innovations of last 50 years – Total Quality, Kanban, Keizan, JIT, FMS, Robotics, AI. They are culture specific. American production management paradigm is supply push system heavily computer based thus prone to forecast and input errors, while Asian is a demand pull system with built-in checks and balances.
China supplies low-cost goods a la Walmart and Dollar Stores for the low incomes. US Tariffs will hurt the very people that can least afford it – unskilled, unemployable whites – the core of Trump Nation. This is political suicide every way you look at.
Do the smart thing. Cut military spending by 80% and devalue the U$.
When the next recession arrives, the stock market helped with the trade war will collapse. The mountains of debt will implode next. US will have no more tool left to save the economy… It will be a success in Trump’s terms, just like he bankrupted his own companies as a businessman.
So far it worked, US consumers spend like druken sailors with about as much discernment, other nations have sold the then the stuff drunken sailors like, that is coming to an end and nobody and his brother is prepared regardless of what the smart people say
Consumption in USA relies too much on borrowings and credits, and not enough on personal incomes. Consumers in USA are spending more than their incomes. This is an unsustainable situation and will only lead to a decline in consumption.