In the International Monetary Fund’s World Economic Update for April 2017, their version of our “Notes”, the IMF announced that “global activity is picking up with long awaited cyclical recovery in investment, manufacturing and trade,” and that global growth is expected to rise from 3.1% for 2016 to 3.5% for 2017. Sounds great, right? While optimism is high, there remains a “but” in the report: “significant structural impediments and a balance of risks [that are] tilted to the downside”. The IMF is concerned about the individualistic approach global leaders are taking in addressing economic problems which the IMF describes as “common challenges in an integrated global economy.” As we look at the current global scene, we had to agree (with a touch of humor) that nothing suggests a willingness to cooperate with neighbors on mutually beneficial solutions quite like building a wall, shooting off ballistic missiles, or exiting one’s regional economic union. Global leaders around the world appear to have a slight more nationalistic view than the IMF’s recommended globalist view. Right or wrong, each world leader is optimistic about the his or her own position.
Economically speaking, optimism is measured by sentiment or “soft” data. Answers to questions like, “How do you feel about … ?”, are collected from businesses and individuals to gauge if business leaders and consumers are feeling positive about their current or future situations. And as previously discussed, the soft data jumped significantly following the election of President Trump. Sentiment is very good and folks are optimistic that “things will improve”, but…there’s that word again…the “hard” data (numbers taken from the economy itself, like car sales, exports, new hires, etc.) is not quite keeping pace. US GDP growth for the first quarter was less than stellar at about 0.7%. This is the slowest growth number reported in the last 3 years. Much of the blame falls on stalled growth in consumer spending and retail sales compared to the fourth quarter. This divergence between the “hard” and “soft” data is raising questions. If folks are feeling optimistic, shouldn’t their optimism show up in stronger retail and consumer numbers?
Since we are on the subject of numbers and hard data, we continue to see strong earnings from US companies. These company-specific earnings reports, as well as the strong sentiment data, continue to support the stock market. Geopolitical concerns, political policies and foreign elections seem to be having little impact on current market valuations. The IMF’s warning of downside risk doesn’t appear to have impacted market participants. But it’s advice regarding global cooperation might have resonated with Secretary of State Rex Tillerson, who recently suggested that he is at least considering how US policies impact our global partners.
In a speech to State Department employees, Secretary Tillerson laid out President Trump’s “America First” foreign policy. While he was clear in stating that America’s interest is in promoting our own national security and economic prosperity, he understood the necessity of working with our partners and competitors around the globe to accomplish these goals. He referred to this as a “balanced” policy. Our cooperation with China and Russia, for example, would be necessary to work toward a denuclearized Korean peninsula, a peaceful outcome in Syria, and the defeat of ISIS—top national security goals. But he also noted areas of our relations with these two countries that lacked balance—our trading relationship with China, and Russia’s aggressions toward Ukraine. How can he get their cooperation on the topics of North Korea and Syria/ISIS while also addressing the “imbalances” he sees in the other areas? It seems that “values” will be sacrificed; Tillerson argues that foreign policy should be used to promote our national security and economic prosperity first and foremost, and that the promotion of American values (human dignity, personal freedom, democracy) are secondary and optional. While we have our doubts about the wisdom of subordinating values to pragmatism, we think the governments of China and Russia would be pleased.
So perhaps Tillerson’s comments were a partial win for the global economy—“balance” is certainly better than “protectionism”, as the spread of global protectionism would be a serious threat to the economic prosperity of America as well as that of our trading partners.
One additional note: In a few days, we are off to Omaha, Nebraska to attend our first Berkshire Hathaway annual meeting. We will report back in next month’s “Notes” what the “Oracle of Omaha”, Warren Buffet, has to say about life, the markets and the global condition.