U.S. and Global Economy Cooling

From the sidelines, everything looks great on Wall Street. Stocks are up with the S&P 500, Nasdaq, Dow Jones Industrial Average, and Toronto Stock Exchange all at, or near record levels. The stock market is a forward-looking indicator, so that bodes well for growth prospects. Or does it? Precious metals are also on a tear with gold at multi-year highs and silver gaping up. Investors typically pour into precious metals as a hedge against economic uncertainty. Recent economic indicators suggest contrarian investors are onto something. U.S. gross domestic product (GDP) slowed in the second quarter and the International Monetary Fund recently slashed its outlook for global GDP.

Most investors are extremely optimistic. But that sunny confidence may be a little misplaced. There are just too many economic indicators pointing to a cooling of the global economy, which would have a negative impact on North American stocks.

U.S. GDP stumbled in the second quarter, slowing to 2.1%. Admittedly, that’s better than the 2.0% gain Wall Street was looking for but is much less than the 3.1% GDP registered in the first quarter.1

What pushed down U.S. GDP? Trade tensions dragged U.S. GDP to its slowest pace since Donald Trump ascended into the Oval Office. Business investment was down and exports slumped. If that continues, hiring could slow down or lead to layoffs which would cobble consumer spending. And consumer spending is a big part of the U.S. economy; the biggest, accounting for two-thirds of U.S. GDP.

In fact, second quarter U.S. GDP numbers would have been a lot worse too had consumers not kept the U.S. economy afloat. Consumer spending advanced 4.3% in the second quarter, the best data since the fourth quarter of 2017.

American consumers can only keep the U.S. economy chugging along if trade tensions subside, exports pick up, and wages rise. If not, the risk of a recession in 2020 is looking more and more likely.

It’s not just the U.S. economy that is struggling. The IMF cut its outlook for global economic growth in 2019 to 3.2%. That forecast has been going lower for the last two years. In April, the IMF pegged global growth at 3.3%, last year it was looking at 3.6% growth, and in 2017 was predicting GDP would advance 3.8%.2

The IMF is blaming weaker global GDP data on escalating trade tensions between the U.S. and China. There might be a so-called truce between the U.S. and China but that doesn’t point to an end to tensions, it just points to ongoing policy uncertainty. And that kind of self-inflicted pain isn’t going to juice the North American or global economy.

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  1. “Gross Domestic Product, Second Quarter 2019 (Advance Estimate) and Annual Update,” Bureau of Economic Analysis, July 26, 2019; https://www.bea.gov/news/2019/gross-domestic-product-2nd-quarter-2019-advance-estimate-and-annual-update.
  2. “World Economic Outlook, July 2019,” International Monetary Fund, July 23, 2019; https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019.

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