Misplaced fears

Germany and Japan contracted in the third quarter. The US economy probably peaked in the middle two quarters of this year. Recently, Federal Reserve (Fed) Chair Jerome Powell and Vice Chair Clarida have voiced concerns about a global growth slowdown. But, we feel like fears are overdone.

The declines in Germany and Japan are old news and temporary. Problems in the auto industry surely drove Germany’s contraction. Car companies stopped production to get ready for new emission standards. In addition, according to Bloomberg, services sector data may be upwardly revised in subsequent releases of the GDP report. Natural disasters, flooding, earthquakes, and a typhoon, weighed on Japan’s economy hitting consumption, inventories, exports, and investments hard.

Growth should rebound in both countries this quarter. Japanese exports already bounced back sharply in October as did a key business survey. German auto production has started to pick up and that should lift broader manufacturing output. In both countries, labor markets are the best in years, and that’s going to support domestic demand.

Concerns about slowing US growth are grossly exaggerated. Fiscal stimulus may have temporarily boosted consumer spending close to 4%. But, wage growth is picking up and that should keep consumers humming along. The recent softness in capital spending may bounce back, leading indicators such as corporate profits, business surveys, and bank lending standards suggest that investment is well buttressed.

Housing has slowed, but fears of a collapse are unfounded. Last week, the National Association of Homebuilder’s Index (NAHB) sharply declined, but that was likely catching up to other weak housing data. Demographics remain a tailwind. Household formation is picking up; homeownership rates are turning around. The homeowner vacancy rate remains very low and the construction sector is still adding jobs. Capping the state and local tax deduction (SALT) likely dragged down home sales this year but its impact will probably roll off the data next year.

Raw industrial commodity prices have recently started to pick up, a good bellwether for global growth. Emerging-market export growth, another good measure of global activity, has only mildly decelerated this year. In contrast, in 2015, during the commodity price rout, emerging-market exports contracted.

We expect growth to mildly slow next year, not sharply decelerate. Europe and Japan may grow at about the same pace next year as this year. But the United States will likely slow down a little bit. Chinese growth is slowing, but stimulus should prevent a hard landing.

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