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December 14, 2017
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The U.S. consumer to the rescue

Comment
Macroeconomic developments created some volatility over the past year, but consumer spending is helping to keep the U.S. economy moving.

Six years after the official end of the Great Recession in June 2009, U.S. manufacturers, wholesalers, and retailers continue to play it safe and act conservatively with respect to their inventory holdings. Many companies, though, have been caught off guard by several major developments in the U.S. and global macroeconomic environment during the past 12 months. These include the following:

World oil and commodity prices have plunged. In June of 2014, Brent crude, a benchmark for world oil prices, stood at around US $112/barrel. By the end of January of this year, it had plunged to a low of $48.40/barrel. As of June 2015, the Brent price had recovered by approximately $15/barrel from the end-of-January reading, but it still remains around $48/barrel lower than its June 2014 level. World commodity prices have also fallen sharply over the past year. The IHS Materials Price Index (MPI)—an aggregation of exchanged and non-exchanged traded commodity prices computed by IHS—plunged by approximately 40 percent between the last week of June 2014 and early July of this year (see Figure 1).

Article Figures
[Figure 1] IHS Materials Price Index
[Figure 1] IHS Materials Price Index Enlarge this image
[Figure 2] Real stock of inventories
[Figure 2] Real stock of inventories Enlarge this image

For most economies, lower oil and commodity prices typically provide a net benefit, but for energy-producing countries whose economies heavily depend on oil revenues, such as Saudi Arabia or Russia, they have a strong negative effect. In the United States, lower oil prices are a good thing or a bad thing, depending on whom you ask—or where you live. For consumers, lower oil prices are good: They translate to lower gasoline prices at the pump, which frees up cash in household budgets and helps to boost consumer spending. Lower energy prices also allow companies to reduce their transportation costs, creating savings that can increase their margins or be passed along to consumers. But falling oil prices are behind a pullback in energy exploration and investment in several parts of the United States, including West Texas, North Dakota, Oklahoma, New Mexico, Louisiana, and Alaska. Moreover, spending on equipment and structures like drilling rigs by businesses in the energy and mining industries has been hit hard as drilling activity has diminished. Texas as a whole is likely to fare relatively well thanks to its diversified economic structure, but North Dakota and Oklahoma are seeing a major impact, since their local economies depend to a significant degree on energy production.

The U.S. dollar continues to appreciate in value. In the past 12 months the U.S. dollar has appreciated considerably compared to most major currencies. At the beginning of August 2014, the value of a euro was in the neighborhood of US $1.34. In mid-March of this year, the euro exchange rate hit a 12-year low of $1.05. It has recovered very slightly, to approximately $1.09 as of the third week of July.

A stronger dollar helps boost imports, as imported products become relatively cheaper, and it lowers consumer and producer price inflation by making imported consumer products and intermediate inputs less expensive. However, it places corresponding downward pressure on exports of manufactured goods.

Several emerging markets are slowing down—and some are in deep recession. The Russian and Brazilian economies continue to contract and are still in recession. Russia's real gross domestic product (GDP) was down 0.6 percent year-over-year in the first quarter of 2015. We at IHS expect a total of four quarters of contraction, with Russia pulling out of its recession by the fourth quarter of this year. One challenge for the country is that over 50 percent of the government's revenue is energy-based, so lower energy prices have a strong negative effect on the economy. Another is that the sanctions imposed by the United States and the European Union due to Russia's involvement in the Ukrainian and Crimean conflicts are unlikely to be lifted before 2016. These sanctions are restraining credit availability—and therefore are elevating interest rates—by isolating Russia from international capital markets.

Brazil's real GDP fell 0.2 percent quarter-on-quarter in Q1, and we expect the second and third quarters to be in negative territory as well. Brazil's troubled economic situation—we anticipate a 1.4 percent contraction this year and tepid 0.6 percent growth in 2016—could also take a turn for the worse. Rising inflation is forcing the country's central bank to raise interest rates at a time when the economy is already contracting.

Turbulence roils China's stock market, and a Greek tragedy unfolds. For anyone in tune with international economic developments, the headlines in June and July of this year have been extraordinary. Greece came very close to exiting the eurozone, and China suffered a major stock market correction.

Fortunately, the "contagion" effect of these events on other economies has been mild, as evidenced by the limited volatility in global financial markets and foreign-exchange rates. One reason is that banks in the rest of the world have dramatically reduced their exposure to Greek debt, from about €247 billion in mid-2012 to €34 billion this year. In addition, European authorities have set up emergency bailout funds to insulate the rest of Europe from the fallout of the ongoing Greek crisis. Another is that the Chinese equity bubble was largely financed with local money, so foreign banks have limited exposure. Moreover, swift action by China's government seems to have stopped the stock market rout—at least temporarily.

Consumer spending gives the U.S. a boost
Mixed or tepid growth in some emerging markets, uncertainty around the Greek debt crisis, and a stronger dollar all have placed significant downward pressure on U.S. exports. Real exports of goods declined 3 percent in the first quarter of 2015. In addition, the labor-related West Coast port disruptions in the last quarter of 2014 and the early part of this year put a damper on both import and export trade. Many retailers had a difficult time restocking, and manufacturers' and wholesalers' inventories were running low in the first two quarters of the year.

After stalling in the early part of 2015, the U.S. economy is expected to resume its relatively better expansion, mostly on the backs of consumer spending and a sustained housing-market recovery. IHS expects consumer spending patterns to be more balanced in the 2015-2017 period than they were from 2010 through 2014, with stronger growth in services and nondurable goods. The robust growth in auto sales that has been an important driver of consumer spending over the past few years, caused by a release of pent-up demand, is likely to moderate. Light-vehicle sales climbed at double-digit rates from 2010 through 2012, but sales growth slowed to 7.6 percent in 2013 and declined further, to 5.7 percent, in 2014. Auto unit sales are expected to increase over the next three years, but at a significantly slower pace. Light-vehicle unit sales are expected to rise 3.6 percent in 2015 and around 2.0 percent in 2016 and 2017.

Retailers have been relatively cautious when it comes to inventory building because of tight margins, fierce competition, and price discounting. However, since consumer spending and the housing market will be the main drivers of economic growth for the next couple of years, IHS expects retail inventory growth to outpace wholesale and manufacturing inventories by a considerable margin in the period 2015-2017 (see Figure 2). We are currently forecasting increases in real retail inventories of 3.4 percent in 2015, 4.9 percent in 2016, and 4.1 percent in 2017.

Manufacturing inventories are expected to be considerably weaker, with exports handicapped by weak global markets and the strong dollar. We expect real manufacturing inventories to increase 0.9 percent in 2015, and then 1.7 percent in 2016 and 1.8 percent in 2017.

Wholesale inventories have seen a disproportionate buildup in 2014 and the first half of 2015, so their growth rate is expected to slow to 2.1 percent in 2016 and 1.5 percent in 2017. Like manufacturing, wholesale inventories are exposed to the weakness of export markets, which is mitigating growth; however, wholesalers also benefit from strength in sales and inventories on the retail side.

Chris G. Christopher, Jr., Ph.D., CBE is executive director of the U.S. Macro and Global Economics practice at the research and analysis firm IHS Markit. David Deull is a senior economist at the economic research and analysis firm IHS Markit.

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