As this column was going to press in early November, the U.S. stock markets were breaking records and reaching all-time highs. Many in the economics and investing community were holding their breaths as we tip-toed through third-quarter earnings season for America’s publicly traded companies, big and small. The high-level concern going into earnings season was that the slowing U.S. economy would unleash a spate of poor reports, and the stock market would confirm what many bears had predicted: the slowdown is here. Well, it didn’t happen.
The Dow Jones Industrial Average rose to a new record in early November, as a five-week stock market rally across all major indexes boosted optimism and confidence the economy is on firm footing. Behind the resurgence are rising hopes that the United States and China are making progress in negotiations on their trade dispute, or at least that they are no longer making it worse. Recent reports also showed that the job market is continuing to grow, corporate profits aren’t doing as badly as Wall Street expected, and interest rates will likely remain low for a while. Even in manufacturing, which has been hit particularly hard by President Donald Trump’s trade war measures, investors saw some hopes that things may be hitting bottom soon.
Understand what drives these highs: Investors are looking out at the next 12 to 18 months and investing on the basis of where stocks are going, not on where we are today. But the shift doesn’t necessarily mean the all-clear for the economy and the market. As many in the popular business press have reported, there is now a new concern weighing on our prosperity, which is the condition of global markets.
The global economy used to have a simple rule: the U.S. led, everyone else followed. Whether it was high interest rates in 1981, a technology bust in 2001, or a mortgage crisis in 2008, it was a weak U.S. that dragged other countries into recession, not vice versa. But this could be the year that script gets turned around. While the U.S. isn’t in a recession, its manufacturing sector has slowed, as has the broader economy. Overall economic growth has tracked close to a 2 percent annual rate, but that is thanks to positive sentiments of consumers, who represent 70 percent of our Gross Domestic Product.
The reasons for this lie primarily with the global, not the U.S., economy. Forces weighing on external economies have begun to wash back on the U.S. Historically, the U.S. has been largely immune from foreign forces because exports were a relatively small part of the economy. But that has changed. The rest of the world’s share of global gross domestic product has grown, primarily thanks to China, so trade has become a larger share of U.S. output, and foreign sales contribute a growing share of U.S. company profits. Also, integrated capital markets mean U.S. interest rates depend more heavily on conditions abroad. If foreign central banks ease, that can drive the dollar higher and tighten margins for American manufacturers.
When President Trump began raising tariffs, manufacturers expected the U.S. would be spared any ill effects. They assumed the measures would bring jobs and production back to the U.S., and other countries would suffer more because they exported more to the U.S. than vice versa. But the pain tariffs have inflicted on other countries may have ricocheted back to the U.S. in the form of weaker global growth, which is weighing on U.S. investment and exports.
With an election looming in 12 months, I think President Trump will push to solve the tariff dilemma and the pressures on slowing global economies will ease, giving the U.S. economy a further strong footing for the next few years.
About the Author
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.