What really matters: the drivers of today’s economy
Every day we are bombarded with data and opinions meant to help investors manage their portfolios. Much of the data can be ignored, because unfortunately most of it is just that—data. As investors, we only want to explore the kind of data that becomes useful information. My team and I will figure out what you need to know to grasp where the market is heading by uncovering what really matters when forecasting economic activity. In a world where a constant stream of economic data and commentary is the norm, it’s crucial to be able to sift through what really matters to make better-informed investment decisions.
The important variables to monitor over the next year will be the U.S. dollar, employment and key global issues.
I visited The Street‡ recently to share my insights.
The U.S. Dollar
The U.S. dollar (the dollar) has become increasingly important because of two key functions.
1) its impact on corporate earnings in the United States.
2) global economic conditions and its ability to provide insight into relative interest rates.
Let’s take a look at the short-term and long-term impact of the dollar on the economy.
With the recently-strengthened dollar, the fast increase is what had a meaningful impact on our economy. A strong dollar makes exported goods and services that are produced in the United States more expensive. Numerous conglomerates have cited the strong dollar as a headwind that has negatively affected corporate earnings, stating that this will be a driver putting downward pressure on earnings and stock prices due to the translation impact1 and competitive concerns2. However, small businesses which typically do not have as much international exposure will not be as negatively affected by a strong dollar. Also, the United States is a net importer; in the first quarter we exported $2.08 trillion and imported $2.63 trillion. Commodities are negatively correlated with the dollar and as it strengthens, commodity prices will fall. This will be a positive for companies that use commodities as an input variable and for the general consumer. We expect continued strength in the dollar.
We see that the dollar typically strengthens when the U.S. economy is outpacing its peers. In addition, we think the United States will soon be hiking interest rates while lowering rates is popular elsewhere around the world. This would suggest more upside for the dollar. However, we think Europe will show signs of economic growth and this should cause the dollar to stabilize. It is imperative that we pay attention to the dollar. It matters more than investors realize.
To learn more about the value of the U.S. dollar, check out my video from earlier this year.
Jobs are one of the most important variables to an economy. As jobs are created, consumer confidence increases and over time, wages increase.
What matters are jobs, jobs and more jobs. Job creation is the critical component in breaking the U.S. economy free from being “stuck in the mediocre-growth-mud.” In the short run, it is not critical what kinds of jobs are created, or whether they are high or low paying. Rather, it’s more important to focus on job growth and a low unemployment rate. Those variables alone will increase consumer confidence and move the markets. This year we expect that an average of 250,000 jobs will be created per month, similar to 2014.
The quality of jobs and wage growth remains in question. It appears there are some structural changes developing.
The U-6‡ is one of the ways the Bureau of Labor Statistics more critically measures long-term growth. The U-6 is calculated by adding the marginally attached workers (people who have become discouraged and stopped looking for employment) and part-time workers to the unemployment rate. This puts the U-6 at 10.8 percent, almost twice the rate of the unemployment rate (5.5 percent).
The jobs created have been in lower-paying industries, such as retail and leisure and hospitality. In addition, part-time employment due to economic reasons has not improved since 2010. This indicates a skill mismatch and a potential structural change developing.
The labor market appears to be tightening; unemployment has improved significantly since 2009, yet there appears to be limited wage pressure. We think once the U-6 breaches 10 percent, wage inflation will appear on the horizon. Employment matters.
Global Gross Domestic Product (GDP)
We operate in a global economy. What happens overseas can have a material impact on the U.S. economy.
All eyes are on Europe. Whether Europe can successfully manage Greece and enter a recovery phase is up in the air. Europe’s economy has been growing very slowly. Similar to the United States in 2009, lower interest rates and quantitative easing by the European Central Bank‡ are now critical to global economic and market activity. Approximately 10 percent of our exports go to the Eurozone‡. The consensus GDP growth in Europe is 1.5 percent in 2015. As monetary stimulus and green shoots of growth sprout in Europe, risk-based assets‡ should perform well around the globe.
China is important to the global economy for two primary reasons:
- China represents the second largest economy in the world. The U.S., the largest economy, has a $16.8 trillion economy, while China’s economy is only $13.3 trillion.
- Even more important than size is growth rate. In 1985, China represented 3 percent of global GDP and the U.S. represented 25 percent. Today, China represents 14 percent and the U.S. has dropped to 19 percent. Even though the Chinese economy is smaller than the U.S. economy, it has been growing at a faster pace. In 2010, China was growing at a pace of 10.5 percent. Growth in 2014 slowed to 7.4 percent, although the data from their government has been questioned by many.
The real risk is if China’s economic activity slows to less than 6 percent growth. For a country with 1.4 billion people a slowdown would send a ripple throughout the world’s economy, as China’s imports will wane. We operate in a worldwide economy and ignoring these global variables is not an option.
Remember to check back for “What Doesn’t Matter: The non-drivers of the economy” next week!
 Translation is negatively impacted because sales generated outside the U.S. must be converted into dollars for financial reporting purposes. Therefore, a higher dollar = lower sales in dollars. So focus on sales ex-currency impacts.
 Example: Airbus, a European airline manufacturer, becomes price competitive versus Boeing, a U.S. airline manufacturer when the Euro weakens relative to the Dollar.
When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.
DISCLOSURE AND IMPORTANT CONSIDERATIONS:
UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.
This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.
All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.
All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.
“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.
*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.
Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.
Securities and Insurance products are:
NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013