Bank of the West U.S. Outlook Report for September 25, 2015
US Outlook Report: More Signs of Weakness in Global Production
We received more confirmation this week that global manufacturing activity in September continues to slow, though there are no clear signs, yet, of a global recession. Preliminary Markit manufacturing PMI’s fell in Germany, the Eurozone, China, and Japan this month.
The weakest manufacturing PMI data comes out of China, where the Caixin PMI produced by Markit dropped to 47.0. Any number below 50.0 indicates contraction. This is the lowest reading on this measure since March 2009. We are lowering our GDP growth forecast for China to 6.5% for 2015 and 6.0% for 2016, from 6.8% and 6.3% respectively. While it’s likely China’s GDP growth is currently below that figure, further policy stimulus could get China somewhat closer to its goal by year-end.
At the same time, global inflation is slipping. Producer prices are contracting steadily in Europe, Japan, China, and the United States, just to name a few major regions, and financial instability is still evident in global equity and bond markets. The FOMC’s caution in raising rates in this environment appears warranted.
I think getting upset at the Federal Reserve for not raising rates last week, is a little like shooting the messenger. After all, the Fed not raising last week didn’t make global PMI indexes decline in September. And it’s a stretch to say the Fed decision helped push oil and commodity prices lower. In fact, delayed action from the Fed should weaken the U.S. dollar and stabilize commodity prices, all else being equal.
Indeed, the financial market’s reaction so far is probably a natural reaction to growing global growth and inflation concerns.
Last week, we cut our inflation forecasts in response to the continuing drop in commodity prices, and this week we cut our U.S. industrial production, business investment, and inventory accumulation forecasts over the balance of this year and into 2016. Excess global capacity in manufacturing and oil production, a stronger dollar, the hit to U.S. corporate profitability due to China, and somewhat bloated business inventories, will likely keep business investment from accelerating along with consumer spending.
The cumulative impact on real GDP growth from these adjustments is to cut about 3 tenths of a percent off of our U.S. real GDP growth forecast for 2016. We now see U.S. GDP growth around 2.4% on an annualized basis in 2016, down from 2.5% this year.
While not a disaster for the U.S. economic outlook, the accumulating evidence is that low commodity prices, weaker demand from China and emerging markets, along with a stronger dollar, will weigh more heavily on U.S. GDP growth over the next six quarters than previously anticipated. On the brighter side, consumer spending forecasts remain intact and robust, and consumers will continue to drive moderate economic growth in the United States. The FOMC pause in September caught some by surprise, but it is hardly the cause for what is ailing the equity markets, you can chalk that one up to the mixed signals coming from the U.S. and global economies.
To find out more, check out this week’s US Outlook Report.
Tags: economy