The Top Three Economic Indicators to Watch: Global Growth, China, and Crude Oil

By: Christopher S. Rupkey, CFA, Managing Director and Chief Financial Economist, MUFG

With the increase in global financial market turmoil at the start of this year, there are questions about the direction and health of the U.S. economy. So what are the signs we can look at now to gauge the economy’s health?

The strength of the dollar both helps and hurts earnings overseas with approximately 50 percent of U.S. manufacturing companies exporting throughout the world. Behind the strength of the dollar and weakness in financial markets early this year are three basic factors: global economic outlook, China, and crude oil.

Global Economic Outlook

The U.S. economy is at full employment, so payroll job gains will be less this year. This means little for the economy or the well-being of consumers and companies, except fewer buyers with new paychecks will be able to purchase goods and services.

We do not see the same level of investment from U.S. companies as in previous recovery cycles. The question: can the economy go forward at a satisfactory pace without companies making those investments?

The U.S. economy is growing and yet many believe China’s slowing economy and currency uncertainty could have spillover effects here. This worry could be based less on economic factors and more on psychology. Sometimes consumers can get the wrong impression about the health of the economy, and such nervousness leads them to curtail their spending.  The economic outlook is not as rosy as it was 12 to 18 months ago, but there are still strong indicators out there showing the economy will move forward this year at a moderate pace.

The Fed is looking to raise rates two more times this year and for the economy to grow from 2 to 2.5%. Unemployment in the Euro zone is above 10%, but continues to decline. The International Monetary Fund looks for around 3% growth for each of the next couple of years. China’s outlook is still at 6.5% growth. Many of the world economies look good, even if global markets can sometimes panic and trend lower temporarily. 

Commodities Driven by China’s Infrastructure Growth:
The Boom and Bust Cycle

During a commodity boom, prices go up; on the bust side, prices go down. These days, we are feeling the effects of the bust side of the cycle. This cycle is implicitly tied to China’s rapid growth in the middle of the last decade. China was able to manufacture goods inexpensively, so the U.S. and other world manufacturers moved factories overseas. They helped Chinese manufacturers build the infrastructure to produce goods for export. There was a tremendous desire for natural resources like steel, iron ore, copper, and crude oil in China to set up this infrastructure to produce exports.

Today, China is not the same manufacturing powerhouse it once was and there is no longer the same demand for these natural resources. Global commodity prices are falling. Companies in countries like Brazil, Chile, and Peru are not able to sustain the revenues from the boom period, so economies in these countries are hurting.

All commodity booms and busts end however. Prices fall to such a low level that commodity manufacturers stop producing. Currently, we are waiting for the bust to hit bottom; we see signs that we are getting close to that point.

The Road Ahead

We see the typical economic cycle driven by interest rates and housing. With exports slowing, the domino effect will be felt throughout the supply chain. Because of market turmoil, many have second thoughts about the strength of the economy and outlook. The U.S. presidential election impact remains to be seen.

At this point, business leaders are cautious, without being overly pessimistic. There is business risk involved with planning, knowing that unforeseen factors can play on forecasts, so they are wisely proceeding with some caution.

Christopher S. Rupkey, CFA

Managing Director, Chief Financial Economist

MUFG Union Bank, N.A.

crupkey@us.mufg.jp

A graduate of the University of California, Berkeley, with an A.B. in Economics, Mr. Rupkey then received his M.A. in Economics from Columbia University in New York. Mr. Rupkey spent his early career working for Larry Kudlow at UBS Paine Webber, moving on to become  Chief Economist at Cantor, Fitzgerald. At MUFG Union Bank, N.A., Mr. Rupkey is presently Managing Director and Chief Financial Economist in the Economic Research Group, focusing on financial markets, Federal Reserve policy and international economies including Japan. He has published the Financial Market Weekly for the bank for more than 20 years.

Mr. Rupkey is frequently quoted in the Wall Street Journal, Bloomberg News, Reuters, Yahoo, and other investor publications. From 2001-2002, Mr. Rupkey was President of the Money Marketeers of New York University, a club in New York made up of Wall Street dealers and New York Fed staff, and was President of the New York Association for Business Economics in 2009-2010. In September 2013, Mr. Rupkey was awarded the 2012-2013 National Association for Business Economics (NABE) Outlook Award. The annual award is presented to the NABE Outlook panelist with the most accurate economic forecast for the previous four quarters.

About MUFG Americas Holdings Corporation

Headquartered in New York, MUFG Americas Holdings Corporation is a financial holding company and bank holding company with total assets of $120.9 billion at March 31, 2016. Its principal subsidiary, MUFG Union Bank, N.A., provides an array of financial services to individuals, small businesses, middle-market companies, and major corporations. As of March 31, 2016, MUFG Union Bank, N.A. operated 370 branches, comprised primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York and Georgia, as well as two international offices. MUFG Americas Holdings Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., one of the world’s leading financial groups.

Visit www.mufgamericas.com for more information.

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The views expressed in this report accurately reflect the personal views of Christopher S. Rupkey, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst’s compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein.

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