The State Of The U.S. Economy…And Where We Go From Here

Lately, there’s been plenty of economic noise in the U.S. (oil prices, retail sales, the upcoming election, a potential Fed rate hike) and around the world (turmoil in Greece and China), and I’ll go through the big events that have had some effect on the financial markets and investor psychology. But, by our analysis, the big takeaway is that none of these drivers have had a major impact on the economy as a whole and they aren’t expected to have any major impacts to round out 2015.

First, let me discuss the U.S. economy as a whole and where it is today. There’s been gradual improvement for six years now, with a few blips here and there. Say what you want about government unemployment data, but the number has improved over the long haul – dropping from around 10% in 2009 to a little over 5% today – and that trend doesn’t look to be changing any time soon. (Figure #1)

Fig. #1

U.S. Unemployment Rate Moving Lower

Source: EverBank Research Team, based on analysis of publicly available data from the U.S. Bureau of Labor Statistics.1

Gross Domestic Product (GDP) has also grown. Last year (2014) was the first year the U.S. experienced two quarters of GDP growth greater than 4% since The Great Recession. (Figure #2)

Fig. #2

GDP Growth Gaining Steam

Source: EverBank Research Team, based on analysis of publicly available data from the U.S. Bureau of Economic Analysis.2

Investment In China’s Free Floating Currency

But, if you look at the charts, you’ll quickly notice that nothing is earthshattering. We’re still in positive territory, heading in the right direction at a moderate pace, but it’s not at a pace that’s noteworthy.

Let’s look at some recent and significant drivers that have affected the U.S. economy and markets in the past and understand what they mean moving forward.

  1. Oil Low oil prices can be great for consumers because it means lower prices at the gas pumps and cheaper airfares. But, it also means lower revenues for oil and gas companies. Already, oil and gas layoffs have surpassed 150,000 employees and contractors.3 Oil dependent states such as Texas, Louisiana and North Dakota are already feeling the brunt of lower prices, largely due to the aforementioned job cuts.

The price of oil has dropped about 50% over the past year (Figure #3) and public oil and gas companies have seen their market capitalizations dwindle. For example, leading oil giant Chevron has seen its market cap drop from nearly $260 billion to a little over $166 billion.4

Fig. #3

Oil Prices Continue Moving Downward

Source: EverBank Research Team, based on analysis of publicly available data from the U.S Energy Information Administration.5

But low oil prices aren’t new. They’ve been under $70 for more than six months now. They’ve slowed job growth and the economy almost negligibly. They haven’t had enough negative impact to cause alarm among policymakers, probably because the latest unemployment and GDP numbers have not been too negatively affected, as mentioned earlier.

  1. Consumer Spending While U.S. state treasurers expected lower oil prices to drive consumer spending,6 that hasn’t happened. The latest June consumer spending numbers – about $90 spent per day, per consumer – remained virtually unchanged from June 2014 and June 2013, when oil prices were in the triple digits.7 So, even though oil prices have been cut in half – saving people money at the pump – consumers are still not using those savings to go out and spend.

Visa® executives stressed in their last earnings call that they aren’t seeing any effects of lower prices at the pump on spending.8

Retails sales have also been disappointing, providing support to people being cautious of how often they take out their wallets.9 The consensus was that purchases would increase by 0.3%, but instead, they decreased by 0.3% for the most recent quarter. (Figure #4)

Fig. #4

Retail Sales Didn’t Meet Expectations

Source: EverBank Research Team, based on analysis of publicly available data from ycharts.com.10

Retail sales tend to be cyclical though. Retail spending now is no different from where it’s been historically over the past few years, which is around the $380 billion to $390 billion range. Consumers could be waiting to spend their dollars once the holiday season hits, when most retail spending is done anyway. Expectations will be high then. That’ll be the true litmus test – to see if people actually are saving to splurge later in the year. If retail sales from Q4 this year don’t exceed analyst expectations, then 2016 could be a terrible year for the economy and, in turn, the markets.

  1. Turmoil In Greece Greece has played out. It’s being bailed out…again.

I don’t think this was a surprising development. It’s still in the European Union (EU), and the nation still uses the euro. Even if Greece was kicked out or willingly chose to leave, it doesn’t look very likely that other nations would follow suit.

While the economic scale of Greece is very small, the biggest reason it became such a big news story was due to fear of contagion. As we see improvement in the economies among those other nations that were considered to be in the same boat as Greece, the likelihood of a mass exodus out of the euro gets smaller. It still looks like things will remain contained and when the dust settles, I don’t think we’ll see any changes to the cast of characters currently using the common currency.

  1. China’s Bear Market China’s stock market recently had the biggest one-day drop (8%) in eight years.11 Its stocks have continued to slide since then.

China is having a bigger impact on all the financial markets – equities, bonds, commodities, and metals. But, China has a relatively new equities market that makes up very little of the overall global marketplace. Figure 5, below, shows how little China’s equities market contributes to the total world market.

Fig. #5

China’s Equities Market Small Part Of Global Marketplace

Source: EverBank Research Team, based on analysis of publicly available data from WorldBank.com.12

China is going through a slow patch right now, and we’re of the thought that its economy is not in a situation of imminent collapse. Already, regulators have bought stocks to stabilize prices13 and the Chinese Central Bank has pumped cash into the system in an attempt to steer the ship into smoother waters.14 While its global equity market share is nowhere near the U.S., most investors and financial markets will be keeping a close eye on economic growth figures to see if there are any spillover effects from China’s equity crash.

  1. Upcoming Election Election years bring a lot of uncertainty as it pertains to policy moving forward. But the upcoming U.S. presidential election does not appear to impact what the Fed and Chairwoman Janet Yellen will do in the near term. It could affect the psyche of the financial markets because markets aren’t fans of ambiguity, but as the campaign ads kick into high gear, it looks like business as usual with the Fed.

As far as the economy goes, short-term fluctuations in the market aren’t representative of the economy, so don’t expect election polls to affect the economy as a whole.

In summary, the U.S. economy likely won’t slip back into a recession this year. We don’t currently see any major drivers to throw the U.S. economy off course for the remainder of 2015.

We’re not seeing anything great or terrible, but we expect that the Fed’s potential decision to hike interest rates slowly later this year or early next year may lead to additional movement and subsequent policy.

As always, cautious investing to all.

Until the next Daily Pfennig® edition…

Sincerely, Mike Meyer Vice President EverBank World Markets, a division of EverBank 1.800.926.4922 www.everbank.com