It’s becoming increasingly difficult to make sense of the conflicting signals coming in about the state of the global economy. Last week a solid U.S. jobs report coincided with the worst manufacturing survey in years. Outside the United States, the outlook is even murkier: Many of China’s leading indicators are hitting multi-year lows, but the European economy is showing surprising resilience, as data accessible via Bloomberg show.
It’s no wonder, then, that going into 2016, perhaps the biggest question for investors is: “Will the global economy improve, stabilize or slip into another recession?”
My take: For now, at the aggregate level, global growth looks steady, albeit slow, and the outlook for the U.S. economy is similar.
The Global Investing Landscape
Starting at the global level, a good deal of investor concern is rightly focused on China. Not only is the Chinese economy slowing, but everyone appreciates that Chinese economic data leave room for a healthy degree of skepticism. Adding to the angst, the slowdown isn’t limited to China. Other emerging markets, notably Russia and Brazil, are already suffering contractions. There’s a justifiable fear that the problems in emerging markets are simply a precursor to a broader global slowdown.
In my view, while 2015 will likely turn out to be an uninspiring year, with global growth close to 3 percent, there are few signs of an imminent recession. It’s true that many cyclical commodities, such as copper and iron ore, are deep in a bear market, normally a warning sign for the global economy. However, the collapse in commodity prices is primarily a function of oversupply and a shift in the composition of Chinese growth. Outside of commodity prices, most global indicators and surveys are still in expansion territory, with services sectors generally doing better than manufacturing ones.
The U.S. Economy
Looking more closely at the United States, this trend is evident. The U.S. manufacturing sector is clearly struggling under the weight of the emerging market slowdown, a strong dollar and the collapse in energy- and natural resource-related activity. According to Bloomberg, the ISM manufacturing survey fell to 48.6 in November, the survey’s first reading below 50 since late 2012. Other manufacturing surveys also suggest that this segment of the economy is suffering a mild contraction.
However, broader measures of the economy are more robust. The ISM non-manufacturing survey has also fallen, but it remains at a relatively healthy 55.9. Other measures, such as the Chicago Fed National Activity Index (CFNAI), are at a level consistent with 2.5 percent, or slightly better, growth. Finally, as last Friday’s non-farm payroll report demonstrated, the U.S. labor market is in good health, and wages are finally firming.
As such, for 2016, BlackRock’s base case is a continued modest expansion. There will be pockets of weakness, but they will be mostly confined to commodity-sensitive emerging markets and the manufacturing sector.
While this recovery is now relatively old, the good news is that sluggish growth has led to few imbalances, such as an inventory buildup, excess capital spending or a consumer debt binge. This suggests that the expansion can continue. That said, global growth, or the lack thereof, is likely to be the dominant theme in 2016. And a final caveat: Most leading indicators only tell you something about the outlook for the next couple of quarters. How the economy will look a year from now is anybody’s guess.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.
