DGES Economic Outlook

Perspectives

Perception vs. reality in the economic outlook

Concerns and their impacts

Business leaders are increasingly worried about the economic slowdown in China, the impact of low energy prices on the energy industry and related industries, and, of course, the extended bout of turmoil in the financial markets.

Perception vs. reality in the economic outlook​

April 13, 2016

A blog post by Ira Kalish, chief global economist, Deloitte Touche Tohmatsu Limited.

These days, many in the business community are concerned about the economic situation and outlook. Evidence of this caution abounds. Deloitte’s latest survey of US middle-market companies, America’s economic engine: Tapping the brakes, pinpoints uncertain economic outlook as the No. 1 obstacle to growth. Furthermore, the more than 500 executives polled expressed greater pessimism about the pace of growth for the coming year. I recently participated in a Deloitte Dbrief on the economic outlook, and only 12 percent of attendees were more than “somewhat confident” that US economic growth would continue to improve over the next 24 months.

There is no shortage of developments weighing on the collective mood. Business leaders are increasingly worried about the economic slowdown in China, the impact of low energy prices on the energy industry and related industries, and, of course, the extended bout of turmoil in the financial markets. These concerns have many US clients asking me if we are heading into another recession.

US economy remains relatively strong
Sometimes, when sentiment is so negative, it can have a chilling effect on business investment and future growth. I think we’re in one of those periods now. However, if you look at what’s actually happening, there’s a lot to be hopeful about. The US economy remains relatively strong, fueled by consumer spending. In addition to lower energy costs, we’ve seen personal wealth rise due to rising home and equity prices, despite the recent pullback in the latter. Consumers have paid down their debts so their cash flow is very good. And we have a very strong job market, with the jobless rate indicating full employment or close to it.

That should spell good news for companies focused on the domestic market, as are the vast majority of businesses in our latest mid-market survey. But sometimes it takes a reality check to realize it.

Impact of China economic growth
Let’s take each of the worries listed above one at a time. First, China. Although China is a huge economy and its growth is slowing, its impact on the United States may be less than people realize. The biggest concern this slowing growth poses is for US companies that export to China. As Chinese demand slows, we won’t export as much. However, this impact is relatively small: Our exports to China are less than 1 percent of our gross domestic product. So it would take a really catastrophic drop in Chinese economic growth to have a sizable impact on the US economy.

Declining oil prices are good
Then there’s the price of oil, which has come down so dramatically that it has had an almost perverse effect. Normally, declining oil prices are good for the US economy because consumers have more money to spend. Cheaper oil also means low inflation, and that means the Federal Reserve can take its time raising interest rates. But beyond a certain point, lower oil prices tend to do some damage in the form of lower capital spending on the part of energy companies and related industries.

Volatility in financial markets
Finally, the volatility we’ve experienced in the financial markets is clearly on peoples' minds. There’s a lot of concern about the impact of lower oil prices on high-yield bonds and emerging market debt, and there is a risk that troubles in the high yield market might spill over into regular corporate bonds and other asset classes. The Federal Reserve also contributed by spooking the markets when it raised interest rates in December for the first time in nearly 10 years. Indeed, rising interest rates were a chief concern among the mid-market executives in our America’s economic engine survey.

But if you look at expectations for fed rate increases this year, the picture starts to brighten a bit. When the fed officials voted in December to begin interest rate increases, they were unanimous not just in the increase itself but in their view that they would probably raise rates four times in 2016. At their latest meeting in January, they didn’t take any action and they indicated that they are closely following what is going on in financial markets, which suggests that they may postpone some of the planned increases. Now, the financial markets are only pricing in a one rate increase for this year. I think there’s even some possibility that the fed could decide to reverse course and cut interest rates again if the financial markets get even worse.

My expectation is that the US economy will grow at a moderate pace in 2016, between 2 percent and 2.5 percent. I also expect that sentiment will improve as the fed maintains its flexibility, and facts come to light about the true impact of China and the oil price rout. While there’s always the possibility that some unforeseen “black swan” event could further undermine business leaders’ confidence, as things stand now, the level of confidence among business leaders is lower than conditions warrant.

For Deloitte insights on related topics, including behavioral economics, capital spending, and financing, see our latest report, Private company issues and opportunities: What to consider in 2016.

dges economic outlook
Did you find this useful?