We have been reporting for the last several months that economic confidence in the small business realm has been waning. This has also been confirmed in big business via the latest industrial production report by the census bureau. Overall orders for durable goods, manufactured products intended to last at least three years, rose a seasonally adjusted 1.2% in December from the prior month, but when removing transportation, orders grew at a weaker 0.1% pace.
New orders for non-defense related equipment, which is generally considered a business investment indicator, declined 0.7% in December, the fourth decline since August 2018. According to Andrew Hunter, senior U.S. economist at Capital Economics, “There has been a clear deterioration in global manufacturing conditions in recent months.”
The strong dollar likely plays a role in the weakening of goods purchased from abroad, as well as the tightening of lending conditions by many central banks around the globe. Europe’s largest bank, HSBC saw its revenue down 8%, as its CEO blames Chinese slowdown, trade tensions and Brexit. HSBC chief executive, John Flint, said the fourth quarter had been “undeniably weak” and that there were more risks to global economic growth than this time last year.
The three major components involved in global uncertainty leading to a weaker global economic outlook, is the slowdown in China, trade tensions and fears around Brexit. The trade tensions largely between China and the U.S. have been like a yo-yo, with each passing day the reports are that tariffs are in or tariffs are out. Uncertainty creates volatility which is deleterious to our financial markets.
The Chinese economic woes have been well documented, with lower GDP projections and issues with the stability of the yuan. The second largest economy in the world does impact U.S. goods and services, as documented in the industrial production report mentioned. Brexit is the final leg in the international economic trilogy.
The common denominator with the two factors just mentioned is again uncertainty. This is exemplified in the way money center banks have had to deal with debt. HSBC said it had increased its impairment provision by $165m to cover credit losses related to the economic uncertainty around Brexit.
The government shutdown was far from nebulous as its lack of economic indicator releases left the markets in the dark as to how the macroeconomic landscape was shifting. Stephen Stanley, chief economist at Amherst Pierpont Securities, noted, “I view the softness in business investment as a response to policy-related uncertainties, starting last summer with the imposition of tariffs on China, which raised the prospect of a trade war.”
According to the IMF in its World Economic Outlook for January 2019, it states that the global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage points below last October’s projections. The IMF has come up with the same macroeconomic conclusions mentioned, with global risk occurring against a backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about China’s outlook.