Nothing is simple in economics. Falling prices for oil and natural gas should be a net positive for the economy, but not for every individual person. The stronger value of the dollar similarly creates winners and losers. And the vagaries of weather also cause unexpected consequences.
It was believed that consumers would flock to the stores and spend their windfalls from lower costs to fill their tanks and heat their homes. Instead, they have paid down debt and padded their savings. Although retail sales rebounded a solid 0.9% in March from the month before, sales remain below the level of last November.
Personal income grew nicely in February, maintaining a consistent growth rate even as consumer spending remains subdued.
Job growth had been very strong until a surprisingly weak March report. At 126,000, the number of new jobs was about half the 269,000 monthly average gain over the past year. February appears to have been an anomaly. Comparing March against January, almost half the lost jobs were in manufacturing. Falling oil prices have led to layoffs in the oil industry and in its supply chain.
The surging value of the U.S. dollar has altered the competitive economics in industries sensitive to international trade. The value of the dollar has risen 15% over the past year compared to a basket of other currencies. This means a foreign product imported into the U.S. is 15% cheaper in dollar terms than last year. U.S. products made for export are 15% more expensive in foreign currencies. Manufacturers are increasingly feeling pinched and it is understandably affecting job creation. The Institute for Purchasing Management index is still indicating growth, but at a lower rate for five straight months. One of the largest contributors to the slowdown is a decline in export orders.
Europe appears to have stabilized and may be starting to improve, with significant help from the devaluation of the euro against the dollar and the Chinese yuan. China’s growth is still strong at 7%, but the growth rate has gradually slipped. Economists note a “shocking” drop in Chinese exports in March, but may not be acknowledging an unexpected surge the month before. Growth in Japan has been uneven. Russia and Brazil remain mired in deep recessions.
So what does all this mean for investors? The first quarter may show very little growth in Gross Domestic Product (GDP). The dollar is likely a significant factor, but difficult winter weather across much of the country likely had an impact, as it did last year when first quarter GDP fell 2.1%. The economy rebounded as the weather improved last year. Lower energy prices should eventually translate into stronger consumer activity, which generates about 70% of U.S. GDP. It looks like another year of moderate growth, just like the last few years.
If there is any silver lining, the subdued rate of growth allows the Federal Reserve more flexibility in deciding when to raise interest rates. The prospect for higher rates has been a source of much of the volatility in stock prices over the past two years.
Understanding the vulnerability of companies to overseas competition and the translation effect of weaker currencies into the stronger dollar has become significant in recent months. It is also important to note the impact of falling oil and gas prices on the businesses of companies whose primary business may not be oil and gas.
After a couple years when a rising tide seemed to lift all boats, investors have become more focused in 2015. The best results have come from companies exhibiting continued growth despite the numerous headwinds, and from companies subject to takeovers. The S&P was up only 1%, including dividends, in the first quarter. We continue to expect the market to show a positive return for the year despite continued volatility.
If our assurances aren’t strong enough, consider a little “voodoo economics.” The stock market hasn’t shown a negative return in the third year of a presidential election cycle, which this year is, in over 70 years. The concept is that the party in power wants to stay in power, and gives the economy a little boost to keep Americans in a good mood heading into an election year. Or maybe it’s just a random pattern seeking an explanation.