Stocks Recover From Brexit But What's Next For The U.S. Economy?
News last Friday that Great Britain voted to break away from the European Union hit the U.S. market hard. It set off a 3.5% Friday plunge in the Standard & Poor's 500 index and, the following Monday, stocks dropped another 1.8%.
Four days after the two-day 5.3% selloff, the S&P 500 is about back to where it was before the Brexit crisis.
Likewise, for European and U.K. stock markets, which have also substantially recovered.
As previously reported, Brexit is a political crisis and not an economic one — certainly not for the United States.
Great Britain and the European Union account for 2% of U.S. gross domestic product, according to Shehriyar Antia, a former senior analyst at the New York Federal Reserve Bank. If all trade with Great Britain and the E.U. were to end, the impact on the U.S. economy would be marginal. However, that's not happening. Brexit could cause a recession in Great Britain but that does not affect the American economy much.
While the Brexit surprise saddled "hot money" traders with two anxious days, and losses of as much as 5.3%, what really matters is the expected growth in the U.S. economy. And the news is good on that score.
The 70 economists surveyed by the Wall Street Journal in early June saw an average 2.4% rate of quarterly GDP growth for the rest of 2016, which is in line with the 2.5% actual two-year GDP growth projection.
Despite weakness in first-quarter 2016 GDP growth, the economic numbers present us with a "Goldilocks forecast" — growth with low inflation.
The U.S. Bureau of Economic Analysis released its third and final estimate of Q1 GDP growth, which showed Q/Q growth of +1.1%. According to economist Fritz Meyer, that was up from the initial release of 0.5%, and the second release of 0.8%. Significantly, the higher estimate was attributed to growth in net exports' contribution of 0.2% to the overall 1.1% gain.
May personal income and spending were also released this past week. Brexit headlines overshadowed the news that the May figures suggest continued strength in both income and spending growth. Personal outlays account for 69% of U.S. GDP. So this government data was another piece of good news.
Disposable personal income is what's left of personal income after taxes. Personal income drives spending. Disposable personal income and spending have been in recovery for over five years — growing at slightly less than the pre-recession growth rate — following the sharp, recession-related correction of 2008.
The savings rate has remained substantially higher than it was pre-crisis.
Another bright spot in the economic news this past week: real disposable income per capita — a key measure of inflation-adjusted purchasing power — grew at a 2.5% rate over the 12 months ended in May. That's faster growth than during the boom in income and spending prior to the last recession.
Finally, this morning, the monthly data from the Institute of Supply Management (ISM) on manufacturing showed a rebound. The ISM Manufacturing Index is comprised of numerous components, and one of them — the New Orders sub-index — rose to a strong 57%. This suggests orders are in the pipeline, and suggests strength in manufacturing in the weeks immediately ahead.
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