Last week began with some additional data points adding to evidence that the domestic economy is growing at an above-trend rate in the second quarter. By Wednesday global markets were experiencing the first hint of volatility in weeks. U.S. investors were forced to consider the implications of some unexpectedly early mid-term election headlines following the defeat of House majority leader Eric Cantor in his primary election bid by Tea Party-backed candidate David Brat. The surprising election loss may have contributed to some of the mid-week market volatility as it not only created some uncertainty over who will replace the business-friendly Cantor as speaker, but the odds for political compromise on some important economic issues such as immigration reform also may have taken a hit with Cantor’s defeat.
One data point released on Thursday that should give big growth bulls some pause was retail sales for May, which increased less than expected following a three-month surge. This month's gain was half of the 0.6% median forecast of economists surveyed by Bloomberg
For the week, the S&P 500 fell -0.68%, the Dow Jones Industrial Average dropped -0.88%, and the MSCI EAFE (developed international) lost -0.25%.
Here are the 3 stories this week that rose above the noise:
Flare-Ups in Iraq, China, Russia-Ukraine Region Add Risks to U.S. Economic Outlook
According to a recent survey by The Wall Street Journal, economists feel the biggest threat to the U.S. economic recovery is a negative international event. In recent months, there has been a flare-up in geopolitical risks. For example, the conflict in Iraq is intensifying and could cause oil prices to rise further. U.S. equities have held up well this year and reached new highs despite increasing international risks. However, U.S. equities remain vulnerable to a selloff, especially if consumer and investor confidence sours from rising oil prices.
IMF Cuts US Growth Forecast to 2% for 2014 But Maintains 3% Growth Outlook for Next Year
In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8 percentage point to 2 percent, citing a harsh winter, a struggling housing market and weak international demand for the country's products. The fund maintained its 3 percent growth outlook for next year, saying a meaningful economic rebound is under way.
Still, the IMF said significant slack remains in the economy and U.S. officials must do more to stimulate growth in the near term. The remarks came ahead of a Fed policy meeting this week in which officials will consider whether to change or clarify guidance on future rate decisions.
How Demographic Changes Could Boost Americans’ Wages
A blog posting from The Wall Street Journal details some interesting analysis from a real estate consulting firm which suggests that a shrinking labor pool could lead to a tighter-than-expected labor market in the coming decade. Changing trends in immigration, retirement age and technological advances are difficult to predict and could provide some offsets to the rise in wages predicted in the article. However, the trend in wages will be important to watch in the coming years with implications for consumer spending, corporate profit margins and inflation.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
