Market and economic update: U.S. economy grows as Europe, China, and Japan lag behind
World monetary policy, in general, remains on an easier path. The European Central Bank is set to implement its quantitative easing (QE) plan. In addition, China announced further interest rate cuts, and Japan remains committed to QE in support of Abenomics reforms.
The Federal Reserve is set to ultimately buck this trend by concluding its zero-interest-rate policy, perhaps as soon as June, on the back of an improving jobs market. Over the past few months, the market’s attention has been focused on the differing paths of growth — stronger in the United States and weaker in Europe, Japan, and China. Growth patterns, in general, point to a stronger United States, although February flash Purchasing Managers Index estimates for Europe, China, and Japan seem to indicate growth may be stabilizing, albeit at modest levels, in these major economies.
In the United States, the consumer remains the key driver for solid economic activity. Fourth-quarter gross domestic product grew just 2.2%, due to weaker net exports and declines in government spending. The consumer remains the stalwart of the U.S. economy, with personal consumption expenditures growing 4.2% annualized for the quarter, the fastest quarterly pace since 2010. Rising consumer confidence and employment are likely to support solid U.S. economic activity in 2015.
The fall in oil prices has increased deflationary pressures in global inflation statistics. Prices were weak in key economies to start 2015. U.S. prices may be an exception. Despite a 0.7% decline in headline prices for the month, core prices (excluding food and energy) in the U.S. managed a 0.2% increase, consistent with a 1.6% year-over-year gain.
This week’s employment report will give us a picture of wage growth in the United States, which is a key support for core prices. Rising consumer confidence and solid jobs growth indicate to us that wage growth is likely not far behind, which should provide further lift to core prices in the United States.
Outside the United States, inflation remains quite weak. In the eurozone, consumer prices fell 1.6% in January and core prices have risen a very modest 0.6% over the past year. In Japan, prices have seen some lift from QE, with core prices rising 2.2% over the past year, but slower than the 2.5% pace in December. Prices in China also softened, with the producer price index falling 4.3% for the year ending in January, and consumer price inflation softening to 0.8% for the same time frame, down from 1.5% for 2014.
Soft inflation data indicates there is likely significant room for monetary authorities to expand support for the economies in order to allow politicians time to enact important reforms to support their economies.
For more information, go to https://reserve.usbank.com/insights/market-economic-update-3-02-15.
Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.
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