This summer, we’ve witnessed a spike in U.S. economic surprises to the upside. Meanwhile, Europe has managed to surprise us to the downside.
Economic surprises measure how actual economic data prints relative to economists’ forecasts. So, it’s as much a measure of economic forecasting ability as it is a measure of underlying economic health.
Still, it tells a story about the market’s participants.
Because they are such important trading partners, it’s fair to assume that the U.S. and eurozone economies would move together somewhat.
Europe’s internal economic woes have only worsened thanks to economic sanctions on, and deteriorating relations with, Russia, a crucial trading partner.
Meanwhile, the U.S. has managed to get off scot-free.
Indeed, this is why the European Central Bank is surprising us with more easing while U.S. Federal Reserve officials say the U.S. should prepare for earlier tightening.
Market guru Ed Yardeni addressed this decoupling recently:
Can the US continue to grow if the Eurozone’s recovery continues to stall? It is doing a good job of doing just that so far. I think it may continue to do so. The question is, why are the two economies decoupling? The short answer is that the social welfare state remains too big in the Eurozone. There are too many government regulations and regulators, and not enough startups and entrepreneurs. Labour markets remain too rigid. Too much credit is provided by bankers, who aren’t lending, while capital markets remain relatively limited sources of capital. The region depends too much on Russian gas, and isn’t doing enough to find domestic sources of energy. It may also be more exposed to terrorism perpetrated by homegrown Islamic jihadists.
But this is not to say that the two economies are now operating independent of each other.
“If Europe slips back into a recession, the United States economy is surely going to feel it in some way,” warned Blackstone’s Byron Wien.
Wien recently wrote about conversations he recently had during “a series of lunches for serious investors.”
“I was struck by the optimism about the outlook for the U.S. in the face of the unsettled conditions around the world,” Wien said. “I wondered if our economy could continue to thrive in the face of so many problems elsewhere. On top of that you had the threat of cyber warfare and terrorism.
“Our political process seems unable to respond to the challenges confronting the U.S. and inequality is a growing problem. Can America move ahead economically at a satisfactory job-producing pace with all these conditions in front of us?”
For now, the U.S. can enjoy these economic surprises. But everyone should be wary of risks.