Economic Growth Slowed to a Crawl in 2015 and Still Dragging…Trevor Gerszt
The data is in and it bears out what most of us were feeling as 2015 wrapped up; the slowdown was real, with growth in the fourth quarter a dismal less than one percent. That ugly end to 2015 is more bad news for a 2016 that already was looking not-so-hot.
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The data for the last quarter of 2015 shows an economy where, despite healthy consumer spending, the overhang from the strong dollar continues to weigh on U.S. business and manufacturing trying to compete in a global marketplace. Consumers here in the states may be spending, but globally consumers are buying less and that’s killing growth both here at home and abroad.
At the start of 2015 economists were expecting the U.S. economy to grow by three percent. That may not sound like much until you realize that’s three percent of seventeen trillion dollars, which is pretty impressive. But with significant obstacles both domestically and worldwide the giant machine that is the U.S. economy has its work cut out for it to move forward in 2016.
The Dollar Will Continue to Impede Us
The dollar reached a twelve-year high against a basket of other currencies. It seems illogical, but a strong dollar when everyone else’s currency is weak is a serious competitive disadvantage. The outsized dollar is putting downward pressure on commodity prices and makes U.S. goods and services more expensive to foreign buyers. So, a problem that weighed on U.S. business and manufacturing through all of 2015 is getting worse.
Dear Fed: You’re Not Helping
The Federal Reserve continues to throw gasoline on the fire of a strong dollar by, at least publicly, sticking to its plan to further raise interest rates at the worst possible time. Instead of acting when companies were taking near-zero interest loans and using them buy back their own stock, creating the illusion of profitability without real growth; the Fed dithered until the damage was done—then raised rates.
Deflation Spurred by Oil’s Implosion
When it comes to growth the big killer is deflation. In a deflationary environment the cost of goods and services goes down while the fixed costs associated with production remain steady. Nowhere is that harsh reality more apparent than the oil industry, but the same dynamics touch nearly every commodity related industry, including farming.
The Company We Keep
Seizing on the opportunity to magnify themselves at our expense, our so-called friends in global markets didn’t waste any time trying to take business away from U.S. manufacturers. Japan pushed interest rates into negative territory and the European Central Bank pumped massive amounts of cash into its system, effectively devaluing the euro. Usually it’s China manipulating currency to protect its interests at our expense, but who needs enemies when we have friends like Japan and Europe?
All of these factors are acting as a giant brake on the U.S. economy and, if the stock market is any indication, 2016 is going to be a tough year for growth and corporate profits. Instead of being able to count on the Federal Reserve to help pull the ox out of the ditch, if past performance is any indication, we can expect the Fed to continue to do the wrong thing, and always at the worst possible time.
For small investors, 2016 is definitely shaping up to be the year of defensive investments. There’s just too much stacked against the U.S. economy to be optimistic.