5 Things to Know About the Economy This Week: 7/1/2016
Markets Bounce Post-Brexit
International stocks fell further early in the week as investors reeled from the United Kingdom’s decision to part ways with the European Union at the end of last week. But at least in the U.S., those losses were mostly erased by the end of the week.
The Dow Jones Industrial Average closed Monday down more than 250 points at its lowest level since early March but ended up closing out Thursday ahead 235 points and less than 100 points shy of where it sat a week prior, before the results of the Brexit vote were announced. The S&P 500, likewise, had nearly recovered all of its losses, thanks to a strong Wall Street showing on Tuesday, Wednesday and Thursday. Both indexes were up slightly in mid-day trading Friday.
More solid oil prices are believed to have helped stocks along, but many analysts also believe investors simply realized they’d simply overreacted to European instability.
What It Means:
“This is yet another reminder that market forecasters do no better than monkeys throwing darts,” Luke Delorme, director of financial planning at American Investment Services, wrote in a blog post Friday for the American Institute of Economic Research. “[T]his is why prudent investors and advisors need to preach diversification.”
Indeed, the Dow climbed more than 230 points the day before the results of the U.K.’s Brexit vote were announced, suggesting investors were betting on the “Bremain” camp to emerge victorious. So when the “leave” camp ended up on top, markets panicked.
The Brexit saga is far from over, and there are no guarantees the market won’t flinch again should something unexpected come out of Europe. For the time being, though, American financial markets appear to have weathered Brexit’s initial gust.
“The United States appears to be an oasis in the storm,” a team of researchers at Wells Fargo Securities wrote in a research note Thursday. “Growth is solid, albeit unspectacular, which is far better than much of the rest of the world.”
Better-Than-Expected Growth From U.S. Economy
America’s gross domestic product ticked up 1.1 percent in the first quarter – more than double the government’s initial 0.5 percent estimate – according to a report published Tuesday by the Bureau of Economic Analysis.
Significant revisions to America’s trade data saw exports climb 0.3 percent in January, February and March, while imports dipped 0.5 percent. But consumer spending was ultimately bumped down from a 1.9-percent estimate to just 1.5 percent. Considering consumption accounts for about 70 percent of America’s domestic growth in any given quarter, that revision was notable.
All told, the first three months of 2016 represented a slight step back from the 1.4-percent expansion seen in the fourth quarter of 2015 – but the final GDP tally was initially believed to have been a lot worse.
What It Means:
“While a welcome improvement in topline activity January to March, the storyline, nevertheless, remains the same: turning the corner into the new year, without meaningful growth in income, consumers reduced spending,” Lindsey Piegza, chief economist at Stifel Fixed Income, wrote in a research note Tuesday. “While any improvement in the reported pace of growth at the start of the year is good news, the moderate, upward revision does little to increase optimism for additional activity later on in remaining nine months of the year.”
It’s worth noting, though, that consumer spending appears to have recovered dramatically since January, February and March. Analysts generally expect the second quarter to be much better for economic growth than what was seen in the first.
There may not be nearly as much improvement on the business investment front. Without such corporate spending on new facilities and technology for American employees, productivity is likely to continue stagnating, which inherently weighs on workers’ likelihood of getting a raise.
So although spending should be markedly better in April, May and June, few expect the U.S. economy to take off like a rocket anytime soon.
Puerto Rico Snags Debt Relief, Misses Bond Payment
The Associated Press
Puerto Rican officials were scheduled to pay nearly $2 billion in principal and interest on Friday. But unsurprisingly, the U.S. territory was unable to meet those obligations in full.
Puerto Rican Gov. Alejandro García Padilla had previously indicated that the island would not be able to meet its crippling debt payments, and the island has previously defaulted on much smaller payments. This was by far the largest missed deadline throughout Puerto Rico’s ongoing debt repayment saga, however.
On a more uplifting note, the U.S. Senate signed off on a bill that would help restructure Puerto Rico’s debt this week, despite opposition from Sen. Bernie Sanders of Vermont. President Barack Obama signed the legislation, which will install a financial control board to help control the island’s debt payments going forward, among other things.
What It Means:
“We passed one of the last hurdles and we are close to the finish line,” Eric LeCompte, executive director of Jubilee USA religious development coalition, said in a statement Wednesday. “The people impacted the most by this crisis are the vulnerable, who had no role in creating this crisis.”
Indeed, if the Puerto Rican government is ultimately forced to fork over more cash than they can reasonably part with, the island’s citizens – who aren’t directly responsible for the unsustainable amount of municipal bond debt the territory has built up over the last few years – will be cut off from government aid.
The appointment of the financial control board could complicate matters for local politicians, as its existence will take away some of their ability to pick and choose where to direct federal dollars. But, all told, the legislation should help Puerto Rico protect its citizens while insuring that bondholders receive at least some of what’s owed to them.
Trump Lays Out Plans to Make Labor Market Great Again
Presumptive GOP nominee Donald Trump on Tuesday railed against a series of trade deals, presumptive Democratic nominee Hillary Clinton and China’s “cheating” currency tactics during a speech at a recycling facility in Monessen, Pennsylvania – a small town about 30 miles outside Pittsburgh.
At one point in the speech, the bulk of which was read from a teleprompter in a rare step away from the off-the-cuff style Trump has been know for during this presidential cycle, Trump laid out a series of seven steps he would take to jump-start the U.S. labor market. These included withdrawing from Trans-Pacific Partnership negotiations, renegotiating U.S. membership in the North American Free Trade Agreement, labeling China a “currency manipulator” and bringing complaints about China before the World Trade Organization.
Analysts have indicated the speech was politically powerful but economically dubious. But it did ultimately allow the presumptive Republican nominee to lay out specifics of his economic plans – specifics he has previously been criticized for withholding.
What It Means:
Trump’s step-by-step list of how to generate jobs in the U.S. was interesting, though there wasn’t much substance in the speech that the candidate hadn’t already touched on.
But Trump did manage to draw a response from Beijing, who had to this point remained relatively quiet in the face of the candidate’s repeated accusations of cheating and currency manipulation.
“It is hoped that relevant people in the U.S. can objectively and rationally view China-U.S. trade relations, do more to enhance mutual trust and cooperation and jointly maintain the sound and steady development of bilateral economic and trade ties,” Chinese Foreign Ministry Spokesman Hong Lei said during a news conference this week.
This was viewed as a pretty clear shot at Trump, who has periodically blamed China for many of the American labor market’s ailments. Though Beijing has yet to weigh in directly on Trump’s proposed tariffs and trade complaints, Lei’s news conference this week indicates that Chinese officials are at the very least paying attention.
Income, Confidence On the Rise
Americans’ personal income climbed 0.2 percent in May – a step down from April’s 0.5 percent gain but still the 14th-straight month of domestic compensation growth – according to a report released Wednesday by the Bureau of Economic Analysis.
And as incomes rose, so, too, did consumer spending. Inflation-adjusted consumption climbed 0.3 percent last month following April’s 0.3 percent gain.
A separate report published Tuesday by the Conference Board also showed consumer confidence on the rise. The board’s metric jumped 6 percent in June as Americans’ economic outlook noticeably brightened.
What It Means:
It’s unsurprising to see all three metrics pointed in the same direction, considering income, spending and confidence are so interrelated.
It’ll be interesting to see, though, how fallout from the U.K.’s Brexit vote – which temporarily sparked a massive sell-off on Wall Street – will weigh in on sentiment going forward.
Stocks have mostly recovered from their marked dip earlier in the week, but the threat of volatility going forward could drag on confidence and ultimately restrict how much consumers feel comfortable spending. Future employment reports will also be watched pretty closely, as spending and confidence are often incumbent upon a strong and continuously growing labor market.
At least in the second quarter, though, income gains and spending surges are expected to drive the economy’s growth rate significantly higher than what was seen in January, February and March.
“At a time when the global economy is doubting itself in the face of Brexit, the U.S. consumer is emerging with a smile on his face,” a team of researchers at Oxford Economics wrote in a research note Wednesday. “This is good news for the economy as solid employment, firming wage growth and upbeat confidence should support the momentum in the second half of the year.”