Recharge, Regroup and Reassess

U.S. Overview
Recharge, Regroup and Reassess

Economic activity continues to slightly exceed expectations, particularly given the wave of negative headlines from around the globe. Real GDP appears to have risen at better than a 3 percent pace in the most recent quarter, and the momentum seems to be carrying over into the fall. Employment growth picked up as the football season kicked off in September, and the unemployment rate has fallen to 5.9 percent. 

We remain relatively optimistic. Real GDP growth should average a 3.0 percent pace over the next two years. With long-term potential GDP growth well below that pace, the unemployment rate should move meaningfully lower. The improvement has allowed policymakers to remove much of the extraordinary measures put in place during the darkest days of the financial crisis. Defensive measures such as expanded benefits for unemployment insurance and food stamps have been rolled back. The Fed has also nearly completed its asset-purchase program and appears set to hike short-term interest rates around the middle of next year.

The economy appears to be at halftime. The first half was a defensive struggle with generally conservative play calling. The offense will figure more prominently going forward. Consumer spending remains the workhorse and seems to be gaining strength from improving employment conditions and falling energy prices. If growth is to truly ramp up on a sustained basis, homebuilding and government spending will need to come off the bench and make meaningful contributions.

International Overview 
Is the Global Expansion Coming Off the Rails?

It has become increasingly evident that economic activity in  many foreign economies has hit a soft patch. Purchasing managers’ indices suggest that economic growth in the Eurozone remained sluggish in Q3, and growth in Chinese industrial production recently weakened to its lowest rate since the depths of the global financial crisis. Many other foreign economies have not been immune to slower growth.

However, the global economic expansion is probably not  coming off the rails. For starters, growth in the U.S. economy appears to be solid, and few economies are showing signs of outright contraction at present. Real GDP growth in the euro area should strengthen somewhat in the quarters ahead as the depreciation of the euro helps to boost the price competitiveness of Eurozone exports, and as some of the easing measures that have been announced in recent months by the European Central Bank start to support growth at the margin. Chinese economic growth likely will slow further, but at roughly 7 percent it remains high relative to the standards of most other economies in the world.

In sum, we generally remain constructive on the global  economic outlook, but acknowledge there are some downside risks that, if realized, could lead to slower global growth, if not outright contraction. In that regard, we are keeping an eye on the Russian-Ukrainian crisis, as well as the standoff between students and the government in Hong Kong.