Market and economic update: Small businesses remain optimistic despite weather-related retail declines

U.S. economic data have been softer to start the year, despite very strong employment growth. Retail sales slowed for the third month in a row, dropping 0.6% in February and falling 2.3% over the past three months.

This is the largest decline since the 2009 recession. February snowstorms in the Northeast are thought to be the primary culprit for slower activity, and the decline in gasoline prices has also slowed sales at gas stations. Small business optimism and consumer sentiment both remain solid positives, along with the strong jobs market. In the near term, it appears consumers have been saving their windfall from lower energy prices, perhaps waiting for greater confidence to deploy their savings. Despite these softer data, we remain confident that U.S. growth is likely to average 2.5% to 3% over the course of this year.

Many market participants have been watching for financial problems in China, led by slower growth and relatively high debt-to-GDP levels. The early slate of February economic data for China indicates growth remains slow, due to slower growth in industrial output and retail sales.

Evidence of stabilization in economic activity seems to be accumulating, with consumer price inflation rising in February after slowing for the past seven months, and money supply and loan growth turning higher after a similar decline.



To combat the debt overhang at the local government level, which could be one culprit behind slower growth, China’s Finance Ministry announced a debt swap for up to 1 trillion yuan of relatively high interest rate local government debt for the lower interest rates of national government debt. While this action is small relative to total local government debts, which total an estimated 30 trillion yuan according to Societe Generale, it may establish a pattern for future potential swaps. The swaps appear to reduce debt service costs, although not the total level of debt, and may allow local governments some budget flexibility to reduce future debt growth.

In the meantime, we believe growth is likely to remain slow while the economy adjusts to less lift from infrastructure spending and exports, and transitions into a consumer-led growth paradigm.

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