Fisher Investments Editorial Staff
Developed Markets, GDP, Corporate Earnings, Geopolitics, Globalization

Transatlantic Economics Tuesday

By, 11/16/2011

Tuesday was a busy day in transatlantic economic news. Below is a brief tour of some of the major releases.

Eurozone treads water

As expected, eurozone GDP grew roughly +0.8% annualized in the third quarter, driven primarily by acceleration in Germany and France. Germany and France have also grown 2.5% and 1.6%, respectively, from a year ago. That comes after similarly positive numbers from the US (2.5% annualized) and Japan (about +6.14% annualized—very robust).

Now, 0.8% annualized growth for the eurozone is undoubtedly anemic. And there are certainly countries facing significant uphill battles—the Netherlands and Portugal both showed negative third-quarter growth, and Spain was flat. No doubt Italy and Greece’s numbers won’t look too rosy, either. But meager eurozone growth (and actually, perfectly fine growth out of the eurozone’s largest economies) isn’t the global double dip many media headlines heralded.

But those were Q3 stats. Since the close of the quarter, eurozone economic metrics haven’t exactly been on fire. Ongoing slower growth or perhaps a quarter or two of overall mild growth is certainly possible. But keep in mind, eurozone economic metrics weren’t on fire in Q3 either, and Germany and France still eked out OK growth. Should Germany and France continue to hold up as they have, that counterbalances the struggling periphery some. Could the eurozone overall see a quarterly GDP dip, or even hit recessionary territory? Sure—it’s always a possibility. But with Japan returning to better economic health, the US seemingly accelerating and Emerging Markets as a whole likely to continue growing much faster, it’s probably pretty tough to get from a sluggish eurozone (with a lot of varying growth rates within) to a global recession.

October US retail sales rise

October US retail sales, reported Tuesday by the Commerce Department, grew +0.5% m/m (+7.2% y/y), eclipsing expectations of +0.3% m/m. Excluding automobiles and gasoline, purchases rose +0.7% m/m (+6.1% y/y), again beating estimates.

Electronics stores led the way, with sales growing +3.7% from September. Internet retail, sporting goods, hobby and book and music stores also positively contributed. And this is no mere blip on the radar screen—defying sentiment and predictions of a consumer slowdown, sales have now risen for five consecutive months, extending an all-time high.

October, of course, is the last month before the typical holiday shopping blitz begins in earnest. And along with the season, we’re expecting headlines discussing forecasts Santa will hand out more lumps of coal this year (or maybe, plastic, coal-shaped lumps to save a buck). (Here’s an early bird already!) This has become almost as standard as the office holiday party. Consider the examples below:

2010:

Consumers Issue a Cautious Christmas Spending Forecast

Holiday Spending Surge Is Unlikely, Poll Suggests

2009:

Retailers Expect Flat Holiday Sales This Year

Christmas Spending Forecast Down From a Year Ago

There are many more. Now, we’re not arguing one should automatically be a contrarian when seeing such headlines, but we are suggesting the mere existence of these headlines—and polling data attempting to quantify what shoppers will spend—is not necessarily indicative of subsequent shopper behavior.

Inflation . . . still benign

One reason some fretted QE2 and the Fed’s ongoing accommodative stance was the increased risk for materially higher inflation. And we concur—to a degree. Milton Friedman said inflation was “always and everywhere” a monetary phenomenon, meaning an excess of money supply coupled with increased velocity of money flowing through the system and not absorbed by the economy, is what chases prices on average higher. So yes, the Fed effectively printing money and maintaining rates so low has the potential to be inflationary tinder.

Except, not yet—as shown by US wholesale prices falling in October. Though US GDP is now at all-time highs, there remains ample slack in the economy—like still-elevated unemployment and nowhere-close-to-maxed capacity utilization. Keep in mind, too, that much of the money the Fed “printed” via QE2 isn’t rapidly changing hands and chasing prices higher—it ended up parked back at the Fed. Even if something happened tomorrow to make banks want to start lending that money out, it would still take some time for it to move through the economy. Higher inflation down the road? Probable. But for now, it seems likely inflation remains benign.

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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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