Business confidence appears to be eroding as company leaders are concerned by a combination of economic and financical indicators. A volatile stock market, ongoing trade disputes, and the possibility of further rises in interest rates have been consistent headlines over the last few months. Moreover, concerns have emerged over a deceleration in the global economy, notably led by lower production out of China as the trade war with its largest trading partner, the U.S. The latest recorded figure and 6-week moving average for the Moody’s Business Confidence Index dropped to the lowest level since October 2012. Although this reading shows an anticipation that the economy may be slowing, most measures of economic performance such as GDP growth and employment levels remain strong.
*WTI Crude Oil Spot Price. Data points through end of February 2019. Change represents month-over-month change.
Following a lackluster end to 2018, a trend driven by heightened financial market volatility and, at one point, a seemingly inevitable trade war with China, manufacturers and service-sector employers appear to have regained confidence. This is indicated by the gains in both the ISM Manufacturing and Non-manufacturing indices through February 2019. Despite the the recent pause and expectations for slowing growth moving forward, both indices remain well above 50, suggesting that the prolonged economic expansion has room to run.
The healthy U.S. economy continues to drive consumption for foreign goods, but a deceleration in economic growth abroad has slowed demand for U.S. made goods. Additionally, the ongoing speculation in how trade talks with China will finalize has not helped quell growing uncertianity. While U.S. exports were flat in 4Q2018 from the previous quarter, they still witnessed healthy 4.4% growth from the same time last year. Appetite for imports also continued to rise from last year, but at slightly moderate pace compared to growth rates seen over the last 24 months. Although a strong dollar and healthy consumer confidence will continue to support overall trade volumes in the near term, an upcoming trade resolution between China and the U.S. must be monitored.
Real private fixed investment increased at an annualized rate of 4.0% in the fourth quarter, an improvement from the previous quarter but a deceleration from investment growth through the first half of 2018. Non-residential fixed investment, led by gains in equipment spending, increased by an annualized rate of 6.2% in 4Q18, overshadowing the decline in both non-residential construction and residential investment.
The spread between corporate and 10-year treasury bond yields from February to November of 2018 steadily increased to their long-term average after two years of steady compression. The expectation of more rate increases at the Fed in response to a robust fiscally-stimulated economy were posing questions of investors- where do things go from here? Although spreads have surpassed their long-term average, the current delay in more rate increases, combined with the healthy state of the U.S. economy, means spreads should moderate in the near term. Expectations of corporate earnings over the same time should remain in the balance as exemplified by the rebound in equity markets from the 30% market correction in December of 2018.
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