Tough to read the tea leaves

Slow growth global economy doesn't equal economic contraction, but it does create more uncertainty

By: Walter Kemmsies
Photo: Pairoj Sroyngern /
   Everything is changing. What is produced, where and how it is made, and how it is delivered have all been changing at an accelerating pace.
   There are more types of goods and services available today than ever before. Most of this is driven by technological advances across a range of activities like e-commerce and automation of logistics services, including emerging autonomous delivery systems. On top of that, the composition of the world’s population and economy is also changing, adding to the economic and trade policy uncertainty in many countries.
   The cumulative effect of all these changes is that it has become increasingly difficult to predict freight flows and, therefore, have a lot of confidence in economic forecasts. Consumer spending has grown at just half the rate it averaged during the decades leading up to the “great recession.”
   This isn’t too surprising considering that just prior to the downturn, the household debt-to-income ratio reached an historic high. It took seven years for overall employment to return to the 2007 peak level, and household spending is still recovering from high debt burdens and weak employment growth. While unemployment has dropped to its lowest level in 10 years, the overall tone of labor markets remains subdued as a substantial segment of the workforce remains “involuntarily employed,” meaning that many people are working in jobs they do not like or that do not allow them to fully utilize their skills. This has been particularly burdensome for the “millennial” generation, which has been impacted more severely than the “baby boomers.”
   Age also weighs on overall consumer spending. Although millennials are now more numerous than baby boomers, the aver-age age of U.S. households is increasing as the baby boom generation enters retirement. Considering all the factors, consumer spending growth has disappointed fore-casters. It has grown faster than expected, however, largely due to low interest rates that have allowed auto and home sales to increase. Retail sales have grown more slowly, but to some extent, this may reflect consumers’ focus on major purchases like homes and cars.
   Slow consumer spending has made the impact of the shift from traditional brick-and-mortar stores to e-commerce particularly onerous for retailers that weren’t prepared. To attract consumers, online vendors have offered low-cost and, in some cases, free shipping, which may be accelerating the shift to e-commerce. Online retailers are also competing with brick-and-mortar sales by offering shorter delivery times, which requires holding more inventory in more locations.
   Even though e-commerce sales only represent 10 percent of non-automobile and gasoline retail sales, the inventory-to-sales ratio has risen over the last several years, reversing a 20-year downward trend. Analysts generally consider rising inventory-to-sales ratios as an ominous indicator of economic contraction. But for the last five years, this variable has proved to be a false signal.

Analysts generally consider rising inventory-to-sales ratios as an ominous indicator of economic contraction. But for the last five years, this variable has proved to be a false signal.

   Coming out of the recession, investment in energy, oil and natural gas—fracking in particular—helped increase investment spending in the U.S. High oil prices provided the cushion pioneering companies engaged in this activity needed in order to deploy this novel approach to extracting oil. As production volumes increased, producers learned how to increase efficiency and lower their costs. Other commodity prices, such as for coal and agricultural goods also remained high, which helped support investment in production equipment as well as in equipment to transport the growing volumes.
   The high commodity prices reflected the change in China’s new status as the world’s largest importer of many bulk commodities. Producers of many bulk commodities expect-ed demand growth in China to continue at the breakneck pace seen from the late 1990s to around 2010, when the country went through an infrastructure investment boom, and invested accordingly. In 2011, investment spending in China accounted for nearly 50 percent of its GDP—twice as high as the 25 percent average for most other countries.
   As China completed major projects, it sought to delay others to reduce investment spending to a more sustainable pace. Unfortunately, many bulk commodity producers were slow to adjust to the change in Chinese infrastructure investment. Excess capacity depressed commodity prices, and as the U.S. began its economic recovery, the foreign exchange value of the U.S. dollar rose, putting further downward pressure on commodity prices because most of these goods are priced around the world in U.S. dollars. The contraction in industrial, energy and agricultural production also caused a decline in investment in exploration, production and transportation equipment.
   This caused trade in industrial goods to decline, which dramatically slowed the pace of growth of overall global trade, leading many to conclude that world trade has peaked. However, it appears that most of the weakness in global trade growth was in industrial sectors, rather than consumer goods. Global trade and economic growth have slowed to a crawl in the last 10 years. The low growth rates reflect the fact that the world’s highest income-per-capita countries have an aging population, and lower income-per-capita countries, which have recently driven high economic growth through investment, are stabilizing.
   The problem with slow growth is that even small economic disruptions can send shockwaves through the global economy, but these impacts do not portend overall economic contraction. In the absence of any large shocks—e.g. a substantial increase in inflation due to rising energy prices that would provoke the Fed to up interest rates—there are few, if any, reasons to expect a recession in the near term because the usual catalyst, a substantial investment boom in one or more industries is simply not evident. There are virtually no speculative excesses for the Federal Reserve to curb. In the current environment of low growth and changes in what types of goods are produced, how they are produced and how they are transported, it is difficult to produce an economic outlook in which one can have confidence.
   In these uncertain times, scenario-based planning is the best way to be prepared for any and all outcomes.

Walter Kemmsies is managing director, economist and chief strategist for JLL Ports.