"Kee" Points with Jim Kee, Ph.D.

Without too much detail, the bulk of the data in recent weeks as well as from the proprietary research that I see suggests that global growth appears to be lifting across most of the world. In the U.S. that includes surges in the Conference Board’s Leading Economic Index and Philadelphia Fed index of economic activity. In China, growth appears to be stabilizing. And that is not just the official third quarter Chinese GDP release last week of 7.4 percent but also a slew of new data on sales and manufacturing (Financial Times). Hong-Kong based Gavekal has argued that the worst is over with respect to the decline in Chinese growth, with the slowdown appearing to have bottomed the 3rd quarter rather than the second as they had originally expected. We’ll see. All of this talk of global and country GDP forecasts reminds me of something economist Herbert Stein (actor Ben Stein’s father) once said, and that is that “no one would have expected such an impossible feat of forecasting if the economists hadn’t thought up the idea of GDP in the first place.” His modest views of economists are worth hearing: “if someone is going to talk about economics on TV it is probably better done by economists than by politicians, columnists, sociologists, or clergymen – who seem the most likely alternatives.”

In Europe, Eurozone tensions have eased, leading to an increased demand for higher risk assets and a fairly dramatic decline in key European interest rates like bond rates in Spain, Italy, Portugal and Greece (Financial Times). As an aside, my biggest concern with low growth in Europe as well as the U.S. and other places abroad is that, historically, it tends to increase the incidence of both domestic and international strife. That’s particularly true of protectionism, a global “us versus them” mentality. From an economist’s perspective that’s a concern because wealth is created by production and exchange. Of these, exchange is most import, as value can be created merely through exchange by moving resources to their most highly valued uses. Not so with production. When global exchange is lessened, plants and firms (and workers) that made sense in a global economy become redundant in a local economy.

Slower growth, by the way, is being reflected in third quarter earnings releases of U.S. companies, which is probably the key reason that equities sold off last week. About 123 of the S&P 500 have reported their 3rd quarter earnings thus far. Expectations weren’t high, and about 63 percent have beat (previously lowered) expectations for profits or earnings (“bottom line”), but only 38 percent have beat expectation on revenues or sales (“topline”). I’m guessing that the biggest earnings and sales misses are coming from the more globally-oriented companies, and a preliminary look suggests this to be the case, but we’ll have to wait for all companies to report to know for sure. Of course, even earnings are somewhat backward-looking, so the importance of corporate “guidance” and commentary is heightened in times like this. Right now I’m hearing little optimism – or pessimism – but mostly wait and see or “steady but not strong” remarks from CEOs.