Most of the recent economic news from developed economies has been good. European growth, in particular, seems to have accelerated. Nothing I see in the economic data causes me worry. So I am cautiously optimistic that this upturn will last at least through 2018. So let me go through the data, my outlook and my concerns.
Let’s start in the US, where the economy is recovering nicely from a hurricane-ravaged couple of months. The last jobs report showed a loss of 33,000 jobs in September. But this number was clearly weather-related and people are now expecting a big turnaround, with consensus estimates presently at 312,000 jobs for October. Moreover, jobless claims have now fully recovered from the hurricanes, with the 4-week average initial claims below 240,000 and more than 12,000 under year ago levels. These are good numbers. With wage costs now rising at the highest level in 2 1/2 years and economists expecting the unemployment rate to remain steady at 4.2% when data are released on Friday, this sets the stage for a rate hike in December.
Economic growth has also been good. Annualized growth in Q3 was 3.0% after a 3.1% number in Q2. I tend to look at the rolling year-over-year number to gauge trend growth and directionality and that number is now modestly above the 2% level the economy has been tracking for a number of years. Now recall, we went well into stall speed as a result of the shale oil bust and bottomed at 1.23% in Q2 2016. Year-on-year growth is now up to 2.25%. And US consumer confidence is up to a 17-year high on the back of these numbers.
Europe is where the big story is right now because growth there had lagged the US and the UK due to the lingering effects of the sovereign debt crisis. But now the Euro zone is growing faster than anticipated, with numbers coming out today showing 2.5% growth, year-on-year. That’s higher than the year-on-year numbers in the US. And unemployment in the euro area, while still high at 8.9%, is now at its lowest level in almost nine years. The figures underscore the ECB’s recent decision to wind down its quantitative easing program.
I want to skip Japan – which is also doing well – and focus on the UK for a second, because it is lagging as the effects of Brexit take hold. Year-on-year growth is now just 1.5%, pushing the UK into the stall speed area that I believe makes the economy vulnerable to exogenous shocks. And Chancellor of the Exchequer Philip Hammond has said categorically that he will not add stimulus to his budget just yet because he is worried about keeping deficits down.
With the Bank of England set to raise rates for the first time in a decade, the UK is seeing a slowdown that is being met with a restrictive monetary policy and a restrictive fiscal policy. This is a worst case economic starting point, and the reason the economy is vulnerable to exogenous shocks. I am pessimistic about future UK growth, where I see upside in the euro area. I believe the US will remain in its 2ish% percent channel. But the 3% numbers from the last two quarters show that the risk is to the upside.
What this means for the global economy and markets is that we are operating with a tailwind right now in every part of the world save the UK. Last week I wrote about markets that were overbought. The reality is markets can and probably will go higher still as long as the economic data continue to reaffirm an upward path. What concerns me, however, is this:
US ??Household Net Worth as Share of Disposable Personal Income. (Bloomberg) pic.twitter.com/PvJhqknA6l
— Daniel Lacalle (@dlacalle_IA)
Household net worth is increasing on the back of assets that are likely inflated in value. To the degree that households are taking on debt against those assets, you have the makings of a substantial deleveraging when the next downturn does occur. I think this is a ways off right now, frankly. But the signs of financial market excess are mounting. And that is a reason to worry even though the economic outlook is so good.
Having said that, in the next several days, I actually want to look at individual economic data points and tell you why I think they bolster the case for optimism about the economic trajectory.