It’s Us vs. Them

By David B. Armstrong, CFA | Oct 14, 2015 | Weekly Market Commentary

Everyone seems to be focused on the global economy over the last couple of months amid fears that sagging growth around the world will take its toll over here in the good old USA. The basic question everyone is asking is, “Will the U.S. economy take a big hit because of problems in developing markets and China?”

China is going through somewhat of an economic transformation. It’s moving away from manufacturing and exporting and towards consumption and services.  As this is happening, there is an economic slowdown and commodity prices have started falling.  So while this may be a painful rebalancing, the services economy will buffer the impact of this shift over the shorter term.  I think we will be hearing a lot more about a “hard landing in China” in the news but we don’t think that will materialize.  The manufacturing in China will cause cutbacks in the Industrial sector, which will continue to impact mining, energy and probably metals.  But the pullback in those sectors has already been felt…and well written about.

Add to this the looming increase in U.S. interest rates, which may have global repercussions, and you get some worry and volatility.  Domestically, the U.S. dollar is up, which makes our goods more expensive overseas.  That hurts the earnings of the big U.S. companies since a large majority of them derive their revenue from overseas sales.

See this chart below and notice that U.S. exporters are feeling the pinch.

 

Here’s the thing – U.S. sales of goods and services overseas make up just 13% of total U.S. output. Consumer spending accounts for nearly 70% and has been rising – albeit at a modest pace, but it’s not shrinking!

I can hear the question in your head as you read, “What the hell is included in ‘goods and services’?”

Well, it’s interesting…

In the first eight months of the year, total exports are down $59 billion to $1.5 trillion versus the same period one year ago. This is all U.S. Commerce Department data, by the way.  Now when you look at the exports of goods, they are down $66 billion and services are actually up by $7 billion.

Let’s just say that current trends continue and exports slide by $90 billion in 2015.

That’s a LOT of dough. And it’s significant.

Except it’s not as significant when stacked up against a U.S. economy of $18 trillion.  On a percentage basis, that’s about 0.5% of Gross Domestic Product.

If we breakdown exports by major regions you’ll notice something interesting, like exports from Canada.  See this chart below from Charles Sherry.

Comparing the first half of 2014 against the first half of 2015, you can see that the European Union and China don’t really move the needle.

CHINA. You know, the country getting all the blame for the recent stock market volatility.

Instead, sales of U.S goods and services overseas that make up 13% of total U.S. output is seeing most of its weakness reflected in trade with Canada.

CANADA.  Yeah…Canada.

Any day now CNBC will be on fire with everyone screaming about Canada blowing up the U.S.  (Drip…drip…drip…that’s my sarcasm.)

Here’s the deal.  Yes, weaker U.S. exports hurt at the margin, but the overall share of exports (which is small) as it relates to the size of the U.S. economy (which is big) will be what insulates the U.S. economy from any serious long-terms overseas instability.

Call with questions or concerns.

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