Fisher Investments Editorial Staff
Into Perspective, GDP

A Second Glance at Growth

By, 03/04/2015

Is the global economy slowing down? Seems many think so, based on concerns over US growth’s downward revision and the UK’s “unbalanced” expansion, for example. However, these widely reported headline figures don’t tell the tale; data overall confirm global growth is continuing apace.

In the US, Q4 2014 GDP was revised to 2.2% seasonally adjusted annual rate (SAAR), lower than the 2.6% preliminary estimate. However, this revision says more about GDP’s statistical quirks and limitations than faltering growth. Higher imports and leaner company inventories were the downward revision’s main drivers. Yet rising imports indicate healthy domestic demand—a positive! And leaner inventories are subject to interpretation. Are companies forecasting bad times ahead, or were shelves depleted by healthy demand? Given consumer spending rose at the fastest clip since 2010 and business spending also advanced, healthy demand seems more likely—suggesting possible future restocking. A look at the purely domestic private sector measures combined—personal consumption, business spending and real estate—shows accelerating growth.

While a second look at October-December 2014 growth won’t tell you about current—let alone future—prospects, other data suggest the US is chugging along. The Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) highlight the private sector’s strength. February’s Services PMI increased to 56.9 while Manufacturing hit 52.9—readings over 50 indicate more businesses saw growth than contraction. Likewise, the New Orders subindexes for both Services (56.7) and Manufacturing (52.5) allude to future economic activity. Some were downright perplexed when low oil prices didn’t goose consumer spending, which fell -0.2% m/m in January—particularly the -0.1% m/m durable goods spending drop. But consumers don’t exclusively spend on goods—services spending rose 0.5% m/m, and the headline negative is dragged down by the very same falling oil prices—adjusted for inflation, headline spending rose 0.3% m/m. The durables drop shows a similar influence, rising 0.2% in real terms.

Similarly, the UK economy seems to be in fine shape. Q4 2014 GDP’s second estimate was unrevised at 2.2% annualized, but the report contained the first glimpse of Q4 spending, and falling business investment renewed jitters over “unbalanced” and “frothy”(?) growth. Yet business investment’s drop is nearly entirely due to declining North Sea oil investment. Thanks to falling energy prices, energy companies have reduced transport equipment and structure spending. Outside Energy, UK business investment in equipment and machinery, dwellings and intellectual property products increased. More recently, UK February PMIs indicate bustling activity. With Services at 56.7 and Manufacturing at 54.1, the UK private sector is expanding nicely—and with new business hitting a three-month high, growth likely continues ahead.  

PMIs worldwide counter slow and weak growth worries. Consider: eurozone February composite[i] PMI accelerated for the third straight month to 53.3—a seven-month high. The region’s biggest economies led, as Germany (53.8) reached a four-month high and France (52.2) returned to expansion. While the Lunar New Year holiday skews the data, Chinese growth doesn’t seem set to plunge. February HSBC PMIs—covering smaller, private firms—hit 50.7 in Manufacturing and 52.0 in Services. Official PMIs, which add in state-owned behemoths, show Services at 52.0 and Manufacturing at 49.9. Though Manufacturing fell into slight contraction, consider: PMIs measure breadth of growth, not magnitude, and the weeklong Lunar New Year festival shuttered businesses for long stretch. China has been transitioning from a heavy industry-led economy to a services-based one—and along the way, manufacturing PMIs have occasionally contracted—this reading isn’t a surprise. Plus, the headliners aren’t the only ones driving growth. The February JPMorgan Global Manufacturing & Services PMI—which spans 32 countries, from the US and India to Mexico and Singapore—reached a five-month high of 53.9. The forward-looking New Orders component ended at 54.0.

Looking ahead, The Conference Board’s recent Leading Economic Index (LEI) readings suggest growth continues. In January, US LEI rose 0.2% m/m—its 11th rise in 13 months—while eurozone LEI increased 0.3% m/m, its third consecutive rise. December UK LEI ticked up 0.1% m/m, ending a streak of three negative readings caused by volatile components like dips in factory orders’ three-month moving average and October’s UK stock market drop—nothing suggesting worrisome weakness. Now, not everything is golden—Brazil’s LEI, for example, has fallen for the past three months (-1.6% m/m in January), reflecting the country’s economic headwinds. But in a global expansion, pockets of both strength and weakness are normal—overall, global growth is no mirage.

 

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[i] Composite is shorthand in PMI-speak for manufacturing and services.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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