Fisher Investments Editorial Staff
Media Hype/Myths

Global Growth: The Underappreciated Gift That Keeps on Giving

By, 12/28/2015
Ratings824.25

Monthly and quarterly economic figures aren’t always the most scintillating tidbits we come across, but they can be very useful to put headlines and common viewpoints into perspective. Take this widely acknowledged truism: Global growth is weak. This meme has constantly dominated headlines, not only this year, but throughout most of the current expansion. In just the last few weeks, for example, contractions in certain US manufacturing gauges have joined long-running fears about a slowing Chinese economy and a tepid eurozone. Yet most other recent data suggest the global economy is chugging along just fine. This is yet another time in this expansion when the data are at odds with the narrative.  

Let’s start in the US. In its third revision, the BEA announced GDP grew at a 2.0% seasonally adjusted annual rate—a smidge lower than the second estimate’s 2.1%—with consumer spending remaining the biggest driver of growth.[i] The slight tick down was due to downward revisions to private inventories and exports, and an upward revision to imports. While we wouldn’t make too much about a third look at July – September data, we do find the imports figure interesting: They rose 2.3%, up from the second estimate’s 2.1%. Because GDP counts rising imports as a negative, the bigger figure actually detracted 0.26 percentage point from headline growth. Yet imports represent domestic demand, and last we checked, higher domestic demand is a good thing. Despite the lower final number, reality is likely better than the numbers reflect.    

Of course, that GDP report covers what happened three to six months ago. Other data provide a timelier look at US growth. Though industrial production fell again (-0.6% m/m in November) as the commodities downturn and mild weather hampered mining and utilities, respectively, the economy has already proven it can grow even as heavy industry wobbles. Consumption-geared metrics suggest this hasn’t changed. Not only did retail sales rise 0.2% m/m in November, but personal consumption expenditures—a better gauge of overall consumer spending since it includes services too—bounced back from October’s flat reading, growing 0.3% m/m.

Those aren’t the only signs conditions remain overall growthy.[ii] Lending has been picking up, rising 8.3% y/y in the week ending December 9, suggesting businesses and individuals have access to capital to spend, invest and ideally, expand.[iii] In 2015, loan growth has averaged 7.9% y/y, by far the quickest in this expansion. As a result, Center for Financial Stability’s US M4, the broadest measure of money, rose 4.6% y/y in November, continuing its overall acceleration dating back to May. For over a century, many economists have argued a rising money supply stimulates economic growth. Rising money supply often means money can exchange hands more quickly—as this speeds up, faster growth follows. Forward-looking indicators confirm more growth is likely, too. The Conference Board’s Leading Economic Index (LEI) continued its long-term uptrend, up 0.4% m/m in November. The interest rate spread and the Leading Credit Index—two of the most forward-looking components since they shed light on lending conditions—remained among the top contributors. No US recession since 1959 has started with LEI high and rising like it is now.  

While US growth tends to get top billing, things across the Atlantic are better than appreciated, too. The eurozone’s growth streak reached 10 straight quarters in Q3, as the second estimate GDP confirmed growth of 0.3% q/q (1.2% annualized), with household spending rising 0.4% q/q (1.7% annualized), adding 0.2 percentage point to headline growth. This growth is also pretty broad-based. Out of 18 reporting members, only three—Greece, Finland and Estonia—contracted. Countries big (Spain, 0.8% q/q or 3.2% annualized) and small (Ireland, 1.4% q/q or 5.6% annualized) are romping along.  

While eurozone industrial production rose 0.6% m/m in October—in line with its choppy overall trend—the bloc’s economy, like the US, is much more services- and consumption-driven. Though October retail sales volumes fell -0.1% m/m (2.5% y/y), food and drinks sales were the biggest detractor. Focusing on non-food products, retail sales rose 0.1% m/m (3.5% y/y).[iv] Markit’s eurozone December Flash Composite Purchasing Managers’ Index (PMI)—which gives a rough idea of growth’s breadth—logged 54.0. Though a bit lower than November’s 54.2, PMIs above 50 indicate more firms grew than contracted. Not only has composite PMI been above this mark for 30 straight months, Q4 2015 caps the strongest quarter in more than four years. Monetary conditions are improving and conducive to growth, too. M3—the eurozone’s broadest measure of money supply—rose 5.4% y/y in October, accelerating over the past three months[v]. M3 is growing at nearly its fastest clip of the current global expansion, underpinned by total loan growth, which stabilized over the summer and turned positive in October (0.3% y/y). And like the US, eurozone LEI has been in a long uptrend, rising 0.5% m/m in November, the sixth rise in seven months, suggesting growth likely continues.

Similarly, across the Channel, the UK economy continues chugging along amidst worries of its strength. Though the third estimate of UK GDP was revised down from 0.5% q/q to 0.4% q/q (1.8% annualized), a downward revision in government spending was the primary culprit. Consumer spending was revised up, and business investment’s strong 2.2% q/q (8.8% annualized) growth went unrevised. Imports rose 2.7% q/q (11.3% annualized), suggesting healthy domestic demand, but detracting 3.6 percentage points from annualized growth. So the headline figure is artificially depressed by GDP’s quirky math. Beyond that, there is little that suggests the UK economy is slow. Beyond Q3 data, other numbers suggest the UK is doing fine. November retail sales volumes rose 5.0% y/y (1.7% m/m), another sign of the UK consumer’s health[vi], while Markit’s November Manufacturing (52.7) and Services (55.9) PMIs indicate UK businesses continue growing. And similar to the eurozone, UK lending has started picking up. Business lending rose 1.1% y/y[vii] in October, breaking this expansion’s long contractionary streak.              

Shifting gears to the developing world, for all the fears about a slowing China, its economy hasn’t deviated from its government-telegraphed path. Concerns about Chinese trade data persisted as both imports (-8.7% y/y) and exports (-6.8% y/y) fell in November, though falling imports largely reflect (unsurprising) slipping oil and commodity prices. In volume terms, crude oil imports are up 7.6% y/y—demand is there. And other data reflect the country’s long-running transition from heavy industry to services. Though industrial production picked up from October’s 5.6% y/y, rising 6.2% in November, it still remains in a longer downtrend, as does fixed asset investment, which rose 10.2% YTD in 2015 compared to 15.8% over the same period in 2014.[viii] However, November retail sales growth sped to 11.2% y/y from October’s 11.0% y/y, perhaps reflecting a bit of China’s huge Singles Day shopping “holiday.”[ix] Regardless, nothing in the data suggests anything is radically different about China’s situation.  

Another way to look at global growth’s current prospects: a slowdown in some parts gets made up by accelerations elsewhere. Now, this doesn’t mean growth will be uniformly great. As we’ve noted before, commodity price-dependent economies will likely continue struggling. But overall, the global economy has continued exceeding persistently skeptical expectations. And with growth likely to continue, this sets up a bullish backdrop for stocks as 2016 approaches.      

 

 


[i] Source: Bureau of Economic Analysis, as of 12/22/2015.

[ii] A technical term.

[iii] Source: St. Louis Federal Reserve, as of 12/22/2015.

[iv] Source: Eurostat, as of 12/22/2015.

[v] Source: ECB, as of 12/22/2015.

[vi] Source: Office for National Statistics, as of 12/23/2015.

[vii] Source: Bank of England. M4 lending to private non-financial corporations, excluding securities, as of 12/23/2015.

[viii] Source: National Bureau of Statistics of China, as of 12/23/2015.

[ix] We use quotes there because Singles Day is a holiday as much as Black Friday is a holiday.

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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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