The world has been battling the aftermath of thecredit crisis for several years now, but we do believe that conditions have improved compared to where they were in recent years.
—Bob Doll, chief equity strategist for fundamental equities, BlackRock
May 7, 2012
Economic Momentum Falters …
Recent data does appear to confirm that economic growth has softened a bit. The April
labor market report was disappointing, as jobs grew a less-than-anticipated 115,000
(although the data also showed upward revisions for February and March). The unemployment rate fell slightly to 8.1%, but even that data was interpreted negatively as it suggests that some are giving up on finding employment and are dropping out of the workforce.
Not all of the data has been uniformly negative, however. The Institute for Supply
Management Manufacturing Survey (which tends to be correlated with other cyclical
variables) came in stronger than expected last week. Additionally, housing market data
continues to suggest that housing may be slowly emerging from a multi-year quagmire.
Finally, we would point to corporate earnings as a source of strength. As the firstquarter
earnings season winds down, results continue to be strong. In our view, it is
likely that corporations will be able to maintain their high profit margins going forward,
especially since labor costs are likely to remain low.
On balance, it does not appear that the economic backdrop has changed enough in
recent months to cause the Federal Reserve to alter its ultra-accommodative course.
We are still not expecting the Fed to announce any sort of new quantitative easing
measures, especially since core inflation remains well contained. It appears to us that
the economy is still growing, but there are reasons to be concerned about its pace.
… Although Longer-Term Outlook Has Improved
Despite these concerns, it would be a mistake to suggest that the global economy is
on the brink of any sort of disaster. The world has been battling the aftermath of the
credit crisis for several years now, but we do believe that conditions have improved
compared to where they were in recent years.
To start, there has been a noticeable change in central bank policy over the last twelve
months. One year ago many central banks were still in tightening mode (the US Fed
excepted). Both the European Central Bank (ECB) and the People’s Bank of China in
particular were raising rates and restricting the supply of money to the global credit
system, which was exacerbating ongoing debt problems. Today, the situation is quite
different. Chinese authorities are working to support their economy in their efforts to
engineer a soft landing. In Europe, the ECB has been on an easing campaign since late
last year and recently gave some indications that an additional rate cut may be in the
offing (possibly as early as June).
From a broader economic perspective, conditions are also better today than they were
one year ago. At this point last year, the United States was coming off of a quarter in
which growth slowed to a virtual standstill and while conditions today are certainly not
great, they are at least decent. Additionally, much of the rest of the world appears to
be on reasonably firm footing. The chief exception, of course, is Europe. That region is
facing worse economic conditions and the financial environment remains dicey and
subject to political uncertainty.