News from international markets last week was anything but pleasant. In recent weeks, Spain's bond yields soared yet again on worries about its economy, then data revealed that eurozone industrial production had shrunk a sharp 1.8%--the largest decline since late 2009, and then the eurozone economy declined by 0.3% in the fourth quarter of 2011 and now appears poised to fall even faster in the first quarter. Inflation in Europe also looked to be on the rise, driven primarily by oil prices. Auto sales for March in Europe also turned in a dismal performance.
On the surface, news out of China was better than Europe's, as China's year-over-year growth rate in the first quarter came in at 8.1%. However, that was down from 8.9% in the fourth quarter, below expectations of 8.3%, and well off a recovery high of close to 12%. A slowdown in Europe, China's largest export partner, and a rapidly slowing housing market mean that dramatic improvement is not immediately in the cards. (I can't help but think the recent political issues in China could distract the government from management of the economy.) A relatively lower Chinese inflation rate (at 3.6% versus 5%-6% a year ago) will give the government a little more flexibility to react to the most recent slowing, if it chooses to, although March's rate of inflation was up from 3.2% the prior month.
Meanwhile, things are looking better in the United States. Midweek the Fed's Beige Book showed an improving economy in all 12 of the Federal Reserve districts. A much better-than-expected trade report and a slightly higher inventory report sent economists scrambling yet again to raise their first-quarter growth estimates. The new consensus seems to be coalescing around a GDP growth rate of 2.5%, which might even prove to be light. Just six weeks ago, many economists were openly fretting that growth in the first quarter might be as low as 1%.
The inflation news last week was good for the US, too. Even as year-over-year inflation is rising for most of the rest of the world, US inflation, as measured by the consumer price index, fell to a 2.7% rate on a year-over-year basis, down from a high of 3.9% last fall and 2.9% in the previous month. In another silver lining to a difficult global situation, a slowing world economy and increased petroleum production and inventories finally broke a 16-week, 22% run in petrol prices. However, Easter/Passover data skewed other economic data in the U.S. last week. Initial unemployment claims popped (bad) and weekly shopping centre sales jumped (good) as both often do just prior to a holiday.
Can the U.S. Avoid a Slowdown?
The key question is can the United States continue to perform well in isolation? Certainly the U.S. derives less of its GDP from exports than most of the other major trading areas, often a lot less. But exports still represent almost 14% of US GDP. So far, a powerful auto industry cycle has more than offset weakening exports. Consumers just couldn't put off auto purchases any longer and needed more fuel-efficient vehicles. As exports look poised to slow further, maybe the housing market will step into the breach to soften the blow of any export weakness. Furthermore, a slowing world economy should put a damper on commodity prices. Higher inflation ate up almost all of wage earners' gains in 2011 and dramatically held back US 2011 growth. However, major exporters such as the agricultural industry, some commodity producers, as well as certain companies could be sharply affected by a slowing world economy and falling commodity prices.
