Fisher Investments Editorial Staff
US Economy

Wandering Through the World Wide Web

By, 09/12/2012

Trading partners

Fears a sluggish eurozone will hamper global trade lost some momentum when the UK released July trade data on Tuesday. From May through July, UK exports to EU countries fell by £1.4 billion from February through April, yet total UK exports grew £0.2 billion.

Historically, the EU has been Britain’s primary trading partner. But in recent months, UK firms have forged new relationships in the developing world, vastly expanding overseas trade. As a result, UK exports to non-EU nations surpassed exports to the EU for the first time in May. The trend continued in June and July, and non-EU exports totaled £38.3 billion over those three months—well ahead of the £36.9 billion exported to the EU.

Firms are nimble. As long as their exports are competitive globally, they’ll find end markets—weakness in Europe simply provides more incentive to forge ties elsewhere. In fact, as governments consider fiscal and monetary stimulus to supposedly help insulate their economies from eurozone weakness, perhaps they ought to consider freeing trade instead. Making it easier and cheaper for firms to do business globally sure seems like a great way to offset weaker demand in one region.

Does dead equal profitable?

It’s not uncommon to hear accounts bemoaning the “death” of American manufacturing, typically evidenced by a decline in manufacturing employment. But over the past couple years, manufacturing’s actually proven one of the economy’s more resilient sectors, contributing significantly to total US output. And as highlighted by Dr. Mark Perry Tuesday, manufacturing profits have been quite robust: “In the three years before the recession started (2005-2007), manufacturing profits were averaging about $110.0 billion per quarter so the recent average of $148.5 billion per quarter since 2011 puts current manufacturing profits 35% above pre-recession levels.”

Lest you worry next those profits are just sitting on manufacturers’ balance sheets, keep in mind US business investment in capital equipment is at an all-time high—which suggests rather than sitting on those profits, businesses (manufacturers included) are raking them in so fast, they can’t spend to keep up with them. And in our view, that augurs pretty darned well for economic activity ahead—no matter how doggedly the media may ignore the facts.

Downgrade Déjà Vu

Stop us if you’ve heard this story before: A major credit rating agency threatens to downgrade US debt if Congress doesn’t set aside political infighting and address said rater’s perception of budget issues. The threat raises many folks’ worries a downgrade would make US debt service payments unbearable and spiral the US into a PIIGS-like situation. Sound familiar? It should. Flash back to a little over a year ago after Standard & Poor’s downgraded the US’s debt from AAA to AA-plus. However, debt yields on US debt did quite the opposite of what was feared—they dropped across the yield curve, and US debt is cheaper today, making federal debt interest payments even more affordable than before S&P’s downgrade. (Which isn’t unusual when AAA-rated sovereigns are downgraded. Simply, markets move first and raters much, much, much … much … later.)

Thursday, Moody’s took a page out of S&P’s playbook and gave us a quick sense of déjà vu, announcing it could downgrade the US should Congress avert the possible automatic spending cuts and tax increases and not replace them with a deficit reduction plan. You got it—Moody’s is in favor of the Republicans playing Thelma and the Democrats Louise as they drive the country off the fiscal cliff.

That might seem logical if you’re in the camp believing the US is overindebted. (We’re not, so we don’t think replacing the fiscal cliff with another ledge is very desirable.) But what strikes us as very odd in Moody’s rationale is this: It’s not talking about actions the current Congress may or may not take, what with its infighting. They’re talking about the 2013 Congress. And there’s a small matter of an election between now and then that could render all Moody’s handwringing irrelevant. But in the end, the good news is this: Whichever way it plays out, credit ratings agencies’ opinions are probably about as valuable as politcians’. Which is to say, not very valuable.

 

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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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