Alone In Front -- But For How Long?

12/15/2014


Professional cyclists know that riding alone is much harder than riding in a group (known in racing circles as the peloton). A peloton can ride up to 25% faster than a single cyclist. That's because a solo rider faces 100% wind resistance, while the riders in the peloton take turns drafting off each other, moving faster with less effort.

If the world economy was a bike race, the U.S. would be alone in front:

• U.S. gross domestic product (GDP) growth for the third quarter was revised upward to 3.9%. The combined growth rate for the second and third quarters was nearly 4.3%, the best six-month rate since 2003.

• The U.S. added 321,000 jobs in November, the most in nearly three years. Through November, monthly job gains have averaged 241,000, putting 2014 on track to be the strongest year for hiring since 1999.

• Hourly earnings rose 0.4% in November, double what economists had expected and significantly above the 0.1% increase in October.

• Personal-consumption expenditures were revised upward to a 2.2% gain in the third quarter, up from a 1.8% initial estimate. The drop in fuel prices should lubricate further gains in consumer spending. And with consumer confidence approaching a seven-and-a-half-year high in November, the consumer — which represents roughly two-thirds of the economy — is in relatively good shape.

Contrast the strength in the U.S. economy with these numbers from other parts of the globe:

• Japan's economy slipped into recession in the third quarter.

• Much of Europe is showing little if any economic growth. The 18-nation eurozone economy grew just 0.2% in the third quarter, with Germany — the eurozone's largest economy — nearly flat-lining at just 0.1% expansion.

• While China's GDP is growing more than 7% a year, the rate is slowing, which bodes ill for many foreign economies that sell goods to the Asian giant.

• Russia's economy, plagued by the drop in oil prices and governmental sanctions, has probably entered recession.

Of course, the U.S. faces a big question: Can it sustain and build on its lead? Or will the lack of support from the rest of the world eventually sap the U.S. economy's energy and bring it back to the pack?

Judging from estimates for GDP growth in 2015, the U.S. should not expect much help from overseas economies, at least in the first half of the year. The nearby chart shows GDP-growth estimates for nine prominent countries, with most 2015 targets showing modest GDP growth and little or no improvement over 2014. One exception is the U.S.; the International Monetary Fund expects 2015 GDP growth slightly above 3%.

Some economists don't buy the IMF numbers, believing the U.S. economy will cramp in 2015 without improvement overseas. Companies in the S&P 500 Index derive roughly one-third of their total revenue overseas, according to Barclays. Sluggish foreign economies and a strong dollar — the greenback recently soared to a two-year high versus the euro and a seven-year high versus the yen — will provide major headwinds in 2015.

Higher interest rates could also present some challenges to the U.S. economy in 2015. The latest jobs report and other positive economic data provide cover for the Federal Reserve to start tightening in 2015. To be sure, a jump in the 10-year Treasury from its current rate of around 2.2% to perhaps 3.0% would leave rates still fairly low in historical terms. But the move could affect the psyche of business decision-makers, especially if they see 3.0% as just one stop on the journey to much higher rates.

The good news is that individuals have a good tool for assessing future economic activity — the Dow Jones Transportation Average. The index has been spot on thus far in predicting an improved U.S. economy. A close in the Transports above the Nov. 25 high of 9,202.84 would be a positive harbinger for the U.S. economy.

Bottom line: The U.S. economy still appears to have the leg strength to go it alone, at least for the first half of the year. And by that time, help from the peloton might be on the way.


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