Rocky Road Overseas - February 11, 2019

The U.S. economy was an outperformer in 2018. U.S. Gross Domestic Product (GDP) surpassed 4% in the second quarter and 3% in the third quarter (U.S. BEA). While data have been a little more mixed lately, job growth was strong in December and January (U.S. BLS). Overseas, however, the picture isn’t as sanguine.

A Wall Street Journal headline last month summed it up well: China’s Annual Economic Growth Rate for 2018 Is Slowest Since 1990. The imposition of higher tariffs would likely further hamper their economy.

The U.S. suspended its plans to raise tariffs on $200 billion of Chinese goods to 25% from 10% to give negotiators a chance to hammer out an agreement. The U.S. wants greater access to China’s markets, and the end of pressure on U.S. firms to transfer their technology to Chinese partners. Without a deal, tariffs could go into effect in March.

The outlook in Europe may be worse. Last week, the Bank of England sharply lowered its 2019 economic outlook, blaming uncertainty over Brexit and the global slowdown (CNBC). It’s the weakest outlook since 2009.

And it doesn’t get much better when you cross the English Channel. The European Central Bank (ECB) said last week the data “have been softer than expected,” as it cited “geopolitical factors and the threat of protectionism (ECB Monthly Bulletin).”

U.S. impact

Exports make up about 13% of U.S. GDP per the U.S. BEA. It’s been rising over the last 30 years, but it’s not a significant amount.

U.S. sales from S&P 500 companies, however, are higher. In part, larger companies may be more likely to conduct business overseas. But just because a company records a sale in another country doesn’t mean it counts as an export, too.

As an example, a company that serves coffee or burgers may do business in Europe, but it doesn’t export that cup of coffee or burger to Europe! Therefore, any sales won’t show up in the 13% figure of U.S. exports, but economic performance in foreign countries could affect its bottom line.

What happens overseas may have a big impact on individual companies, i.e., Apple’s (AAPL, $170) announcement last month that slowing sales in China would hurt its revenues. What’s going on overseas can sometimes create volatility in U.S. market. Yet, it would likely take a serious global downturn to have a significant impact at home.