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US Economy: It Could Be Worse, Just Look Abroad

11 February 2015 in Trading Ideas

Late last month, the preliminary skinny given on the US economy in last year’s fourth quarter was a decidedly mixed bag.

As the Wall Street Journal reported at the time, the economy grew 2.6%, roughly half the summer’s blowout 5% pace, which was helped by a spree of military purchases that wasn’t repeated.1

The Journal said the report offered both hope and red flags: Households, boosted by a surge in hiring and a slide in gasoline prices, went on their biggest spending spree in almost nine years.

But US companies suffered a dual blow. Imports rose briskly as Americans bought foreign goods that were effectively made cheaper by a stronger dollar, and the slumping world economy tamped down demand for US exports. That caused the trade gap to widen, slicing a percentage point off economic growth.

Businesses also reined in capital spending, particularly on equipment, after stepping up such outlays in the spring and summer.

However, things appear relatively rosy when one considers how well it’s going elsewhere around the world. As a recent Associated Press article noted, China is slowing as it transitions from investment to consumption, Japan has slid into a recession, Russia appears headed for one, and Europe is barely growing.2

Meanwhile, even with a slowing fourth quarter, the US economy is still expected to grow 3.1% in 2015, according to a survey by the National Association for Business Economics cited by the AP.

Plunging oil prices have helped the optimism, as they’ve fallen by about 50% since the summer. The drop, along with more fuel-efficient cars, will save the average US household $550 on gas next year, according to the U.S. Energy Information Administration, the AP said. That means more money to spend on items like cars, furniture and appliances.

It’s also possible that a strengthening US economy could even hinder growth overseas. The AP said that faster growth will likely lead the Federal Reserve to raise interest rates in 2015, which could draw more investment from overseas. The inflow of capital would raise the dollar’s value and potentially cause destabilizing drops in other currencies. Governments and businesses overseas that borrowed in dollars would find it harder to repay those debts.

The AP said that the hot economies of the last decade – the emerging markets of Brazil, Russia, India and China collectively known as the BRICs – will likely grow in 2015 at their slowest pace in six years, according to Oxford Economics, a forecasting firm. Falling oil and commodity prices have smacked Brazil and Russia particularly hard.

While China may expand 6.5% or more, that’s a far cry from the nearly double-digit growth it enjoyed for decades, the AP said. Europe and Japan will be lucky to expand even 1%.

The AP suggested that the gap between the US and the rest of the world reflects a fundamental trait of our economy: It’s more insulated from the rest of the world’s ups and downs than other major economies are. Exports account for just 14% of U.S. output, the smallest share among the 34 mostly rich members of the Organization for Economic Cooperation and Development.

The AP even pointed to one US company largely protected from overseas trends: Globe Specialty Metals, a Miami-based producer of silicon metals, draws 90% of its revenue from North America. Its silicon is added to aluminum and rubber parts used in cars, and robust auto sales have boosted the company’s revenue.

Of course, many US-based companies derive the entirety of their revenue from their home country. There happen to be 25 of them whose stocks comprise our All American motif, a portfolio worth considering if you anticipate a strong US economy will benefit companies insulated from economic stagnancy elsewhere in the world.

Over the past month, the motif is up 2%. During that same time, the S&P 500 has increased 1.4%.

In the last 12 months, the motif has risen 17.3%; the S&P 500 has gained 16.1%.

1Josh Mitchell, “US Economy Hits Speed Bumps,” wsj.com, Jan. 30, 2015.

2Associated Press, “Why the US will power the world economy in 2015,” Dec. 30, 2014, http://www.cnbc.com/id/102300761#., (accessed Feb. 9, 2015).

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