State of the Economy Update: August 2017

State of the Economy Update: August 2017

Polk & Associates CPA, Michigan CPA, Healthcare, Manufacturing, Real EstateInternational markets remain in a state of uncertainty due to the continued ambiguity surrounding expected policy alterations from the U.S., especially regarding NAFTA.

The state of the economy will often dictate how much growth certain industries are experiencing, which can influence their business decisions and modernization requirements. Consequently, Ultra takes a huge interest in world economic affairs, with special focus on the U.S. manufacturing and distribution industries. August’s state of the economy update includes facts and figures captured in July, as well as details about events that have major sway over the economy.

August: Can’t Take the Heat

Projected global growth rates for 2017–18, though higher than the 3.2% estimated for 2016, are below pre-crisis averages, especially for most advanced economies and for commodity-exporting emerging and developing economies. Among the former, many face excess capacity as well as headwinds to potential growth from aging populations, weak investment, and slowly advancing productivity. In view of weak core inflation and muted wage pressures, policy settings should remain consistent with lifting inflation expectations in line with targets, closing output gaps, and—where appropriate—external rebalancing. Reforms to boost potential output are crucial, and slow aggregate output growth makes it even more important that gains are shared widely across the income distribution. Financial stability risks need close monitoring in many emerging economies. Commodity exporters should continue adjusting to lower revenues, while diversifying their sources of growth over time.

Globally, growth outturns in the first quarter of 2017 were higher than the April WEO forecasts in large emerging and developing economies such as Brazil, China, and Mexico, and in several advanced economies including Canada, France, Germany, Italy, and Spain. High-frequency indicators for the second quarter provided signs of continued strengthening of global activity. Specifically, growth in global trade and industrial production remained well above 2015–16 rates despite retreating from the very strong pace registered in late 2016 and early 2017. Purchasing managers’ indices (PMIs) also signal sustained strength ahead in manufacturing and services.

In Europe, the IHS Markit Eurozone Manufacturing PMI decreased from 57.4 in June—its highest level since April 2011—to 56.6 in July. Other key indicators decelerated in July, even as Eurozone manufacturers continued to report healthy expansions overall. Austria, Germany and the Netherlands each rose at their quickest paces in more than six years, with improvements also seen in France, Ireland and Italy. Greece was another bright spot, expanding ever so slightly for the first time since August, even with lingering challenges. For its part, industrial production in the Eurozone jumped 1.3% in May, the fastest monthly rate since November and led by strength in energy and consumer goods. Finally, the unemployment rate in May remained stable at 9.3%, its lowest level since March 2009.

In Asia, the Caixin China General Manufacturing PMI rose from 50.4 in June to 51.1 in July, growing for the second straight month. It was the 11th time in the past 13 months the headline index has expanded, illustrating continued progress in the economic outlook after weaknesses in 2015 and early 2016.

Mixed News in North America

The IHS Markit Canada Manufacturing PMI increased from 54.7 in June to 55.5 in July, its best reading since April’s six-year high. Real GDP in Canada grew 0.9% in the first quarter, picking up from the 0.7% gain in the fourth quarter. That translated into 3.7% growth at the annual rate in the first quarter, with both consumer and business spending boosting the Canadian economy.

In the U.S., economic growth is projected to pick up in 2017 and 2018 as headwinds from past exchange rate appreciations abate and support from fiscal policy begins to appear. Consumer spending will benefit from continued, though slowing, employment gains and, as the labor market tightens, stronger wage growth. With inflation nearing its target and unemployment edging down further, monetary policy stimulus has begun to be gradually withdrawn. As growth picks up, further interest rate rises are projected to contain inflationary pressures and reduce the risk of financial-market distortions. Reducing the size of the central bank’s balance sheet may soon become appropriate. The Administration and Congress are formulating plans to cut taxes and boost infrastructure spending. The present projection assumes no spending increase at the federal level, but a tax reform is projected, which will support consumer spending and investment in 2018. Looking outward, the Trump Administration has released its NAFTA negotiating objectives; new legislation will codify existing U.S. sanctions against Russia, Iran, and North Korea and mandate a congressional review for any changes to existing sanctions and expand sectoral sanctions.

According to the Federal Reserve, total industrial production rose 0.2% from June to July. Compared to the previous year, the index rose 2.2%. Manufacturing production (about three-fourths of the total index) fell 0.1% from June and rose 1.2% from the previous year. Taking a deeper dive into the decline from June, we see that durable manufacturing fell 0.5%, but nondurable manufacturing actually climbed 0.4%. Within durables, softness in motor vehicles and parts drove the decline. Total manufacturing, excluding motor vehicles and parts, rose 0.2% in the month, while durable manufacturing, excluding motor vehicles and parts, was about flat. Compared to July 2016, total manufacturing rose 1.2%; excluding motor vehicles and parts, the increase was 1.7%.

International markets remain in a state of uncertainty due to the continued ambiguity surrounding expected policy alterations from the U.S., especially regarding NAFTA. However, the Eurozone continues to show stability despite the current political climate in the U.K. and terrorism concerns. Against all predictors, China continues to demonstrate its economic strength, month over month and seems to be getting even more stable in its growth.  Markets have not changed dramatically from last month’s update; U.S. regional indexes were mixed this past month with some regions experiencing drastic changes from June to July. Unfortunately, the U.S. uptick in exports in June was negated by a decline in July. The U.S. still specializes in traditional industries with other countries outstripping us in new technologies and markets. Our top trading partners are experiencing multi-year highs in their production industries, and their exports consistently surpass our own. Furthermore, the new administration has declared that NAFTA is to be renegotiated – which puts the U.S.’s relationships with Canada and Mexico at risk – and has issued other executive trade orders in the past month putting trade under higher scrutiny. The U.S. is also planning numerous talks across the globe to examine the trade balance between continents. Overall, world growth is relatively stable but the U.S. position in it remains in flux.

Source: Industry Week

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