Economies around the globe seem to be slowing down a bit – but the US stock market doesn’t appear worried, sitting just off its recent highs. But India, China, and Brazil are all off their highs by double-digits. So which Mr. Market is right? Sy Harding investigates..
Ed. note: Sy published this article on Friday – before today’s US market swoon.
Being Street Smart
Can the U.S. Really Avoid the Global Problems?
May 20, 2011.
Important economies outside the U.S. have problems, and their stock markets have been reacting as stock markets usually do, by rolling over into corrections.
The worries are widely recognized; concerns about that ‘destroyer of wealth’ rising inflation, the negative impact on economies of interest rate hikes being implemented by central banks to fight back at inflation, record government budget deficits, record government debt, the potential negative effect on economies of government ‘austerity’ programs being implemented to work down the budget deficits, and potential fallout from the spreading European debt crisis, to name a few.
The worries are not without merit.
For instance, oil is hovering around $100 a barrel, 50% higher than its level last May. A recent study by economist James Hamilton notes that 10 of the last 11 recessions were preceded by sharp increases in the price of oil. The most recent example was when spiking oil prices reached $97 a barrel in October, 2007. The subsequent global ‘Great Recession’ began three months later in December, 2007. (Global stock markets had already topped out in October in anticipation of that recession).
In China, the world’s second largest economy, it’s not just rising oil prices, but also sharply rising food prices, as well as the potential for rising wage inflation. So China has been raising interest rates and tightening monetary policy so aggressively some experts worry it will bring its globally important economy in for a hard landing, that is, into a recession. Its stock market, down 10% since November, seems to also have that concern.
In Japan, the world’s third largest economy, recession is already a reality. And no, it’s not due to the earthquake/tsunami disaster. Japan’s economy fell back into recession in the 4th quarter of last year, its GDP negative by a sizable 3.0%. This week Japan reported its economy remained in recession in the 1st quarter of this year, negative by 3.7%, and it’s expected the earthquake/tsunami disaster in March will have it even more negative in the current quarter.
In Europe, the United Nations warned in January that the 16-nation euro-zone will fall back into recession this year, under the burden of the required fiscal austerity measures (cuts in government jobs and spending) needed to tackle the record budget deficits. Already Greece, Ireland, Portugal, and Spain are mired in, or are near, recessions. And economic growth (GDP) in the United Kingdom, the 6th largest economy in the world, was negative by 0.5% in the 4th quarter of last year, and just missed the two straight quarters of negative growth that defines a recession, by growing by a paltry 0.5% in the 1st quarter of this year.
In Brazil and India, the world’s seventh and tenth largest economies, inflation is already potentially out of control, running at roughly 7% a year in spite of each nation having raised interest rates eight times over the last year. Their stock markets are down 14% since November in anticipation of the problems facing their previously strong economies going forward.
I could go on about similar situations in Hong Kong, Russia, and a number of smaller emerging market countries.
Yet Wall Street, the Federal Reserve, and the U.S. stock market see no problems for the U.S. from the negatives that are affecting so many other important global economies.
Even though GDP growth in the U.S. surprised economists by falling from 3.2% in the 4th quarter of last year to only 1.8% in the 1st quarter of this year, and most economic reports have been very negative since, Wall Street’s consensus forecast for the current quarter and the second half have not changed, still calling for 3.2% growth in this quarter and the next, and 3.4% in the fourth quarter of the year.
The U.S. stock market also sees no problems. It has pulled back some from its most recent high of April 29, but the Dow is down less than 2% from that peak.
And yet in the last two weeks there have been still more reports that indicate the U.S. economy is probably slowing as significantly, and for much the same reasons, as its global counterparts, including rising oil and energy costs, and state and federal cut-backs in spending and services to tackle record budget deficits.
The reports include unexpected big plunges in the ISM Service Sector Index, which represents 80% of U.S. employment, in the NY State Mfg Index, and the Fed’s Philadelphia area Mfg Index, in housing starts, and permits for future starts, in existing home sales, and the first decline in the Conference Board’s Leading Economic Indicators since last June.
Can the U.S. really escape the growing global problems, especially since the indications are that its economy is slowing right along with the rest of the world?
Seems like a stretch of faith.