Recap & Outlook: Global Economy

Michael Rudd, CFA | President, CEO and Portfolio Manager

Two weeks ago, we wrote about US employment and noted that it has been strong. Employment is a good indicator for the US economy and the Weekly Jobless Claims report is our preferred employment measure. Claims tend to give a very good picture of the current health of US employment and, in combination with other measures, the US economy. This, in turn, can flow into the rest of the world. Claims figures are low again meaning Americans claiming new unemployment is low. This is good as long as inflation is low as well. We do not look at a single data point when drawing investment conclusions; so this week, we examine the data in more detail.

  • We plotted the data again, but this time we focused on the four-week smoothed line to get a better idea of the context of the trend (Figure 1). The smoothed line fell to 201k last week which is the lowest reading since November 1969 (the start of the data set).
  • When one considers the difference between the size of the workforce in 1969 and today, the magnitude of current employment strength is impressive. The labor market is moving to very low levels of unemployment and has done so consistently since the end of the recession in 2009.
  • It is more difficult to interpret central bank intentions, and data in general, for this economic cycle because of the follow-on effects in financial markets from the Great Financial Recession of 2008/9. Quantitative easing measures implemented by all of the large central banks have skewed natural relationships. For example, the US Federal Reserve used to hold just under $1 trillion in assets before 2009 and now have $3.9 Trillion, previously peaking at $4.5 Trillion in 2014. While some of this will wind down over time, market participants expect the FOMC to maintain a $3-3.5 Trillion reserve in perpetuity. This is a new development, which impacts the price of all financial assets and appears to be permanent. We also note that the FOMC is now using interest on bank reserves as a way to slow administered rate increases. This is a new development for this economic cycle which we will spend more time on next week.

“This means that” with low inflation and strong employment, we believe there should be less concern about US recession over the short-term. It is not until inflation increases out of control that central banks react. Other than an unforeseen financial crisis, this is when we have to worry that the economic cycle may be coming to an end. “The market” obviously missed this at the end of last year, which reinforces for us why we focus on our fundamental investment management process.

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