Slow but Steady Growth Expected Through Year End
Oceanside, CA - While the U.S. economy continues to march to the steady “slow growth” drumbeat, the world anguished with sound and fury over the Greece crisis. A new word was even added to the political/economic lexicon — Grexit — meaning Greece exiting from the Eurozone. Eventually, the commotion ended like a puff of smoke and nothing much changed: there was no Grexit, Greece got another bailout which will probably never be repaid, and world markets rebounded back to where it was before all the drama began.
Closer to home, another debt crisis is brewing in Puerto Rico, a U.S. territory. On July 16th the commonwealth defaulted on a bond payment for the first time in its history, putting more than $70 billion in debts at risk. Payment on other bonds is due on August 1st. Top officials say the government is unable to pay due to a difficult economy since the Great Recession. Analysts place the blame on unsustainable government benefits promises. A bill was introduced in Congress to allow Puerto Rico to declare Chapter 9 bankruptcy.
The Chinese StockMarket — a Disconnect from Reality
Meanwhile, the Chinese equity markets became unraveled, plunging over 30% in June. Massive overbuilding in the past decades has led to a cascade of bad loans now defaulting. In addition, a huge government monetary infusion created the giant stock market bubble that came crashing down. “However, it was how the government stopped the free-fall that may have undermined credibility of the Chinese markets,” said Frank Chow, chief economist for Trade Show Executive Media Group. “Such measures as suspending trade of almost 1,500 companies (half the entire exchange), making it a crime for investors to short stocks, and forcing certain companies to buy stocks, reminded the world that the Chinese exchanges are not yet a ‘free’ market,” Chow pointed out.
How could these events impact U.S. trade shows? First, Europe as a region is the largest U.S. trading partner, said Chow, so any significant downturn in Europe will reduce U.S. show participation. Second, many large trade shows are seeking to expand in China and Asia to tap into its burgeoning middle class. “A catastrophic market crash would decimate the wealth and trade in this region along with prospects for new shows,” Chow warns.
Why is Greece So Important?
You may be wondering why Greece, whose GDP is about the size of Connecticut, can generate such seemingly inordinate attention. “We stated in this column four years ago that Greece, given its history and culture regarding debt, would eventually default on the Eurozone’s original bailout program and that has now happened,” Chow said. Most leaders involved in the negotiations realize Greece will never repay the debt, Chow said. Many economists believe Greece and the Eurozone would be better off without each other.
Chow noted that the grave concern was never about Greece, but the fear that Italy, Spain and others will follow suit. “If Greece exits the Eurozone and is able to improve its economy, then other countries would be emboldened to do the same,” Chow pointed out. If the Eurozone was too easy in refinancing Greece’s debt without austerity measures, then other countries would likely demand the same treatment. “By Greece capitulating to new austerity measures, the Eurozone dodges a bullet and salvages the union for another few years until Greece needs another bailout,” he said.
So, where does the U.S. go from here? First, it’s important to understand the Greece/Eurozone and China issues are not resolved — only papered over, essentially kicking the can down the road, he said. Puerto Rico is just starting to unravel. “Don’t expect these economies to come roaring back anytime soon to bolster economic prospects for the U.S.,” he warned. Furthermore, Chow said there’s a growing awareness the U.S. economy probably will not meet the robust 3%+ growth expectations from the beginning of 2015. Here are some predictions for the rest of 2015:
- The Atlanta Fed real GDP forecast for Q2 has improved since April, but is still a low 2.4% compared to the Blue Chip and MarketWatch surveys of 2.9%.
- The Federal Reserve at its June FOMC meeting predicted continued mild improvement with GDP growing 1.8% to 2.0% in 2015; 2.4% to 2.7% in 2016; and 2.1% to 2.5% in 2017.
- The National Retail Federation's Back-to-School Spending Survey found that back-to-school sales are estimated to drop 9% this year.
- Moody's raised its outlook on the U.S. retail industry to positive from stable, and maintained its 2015 sales forecast of 4% to 5% growth, despite June retail sales falling 0.3% — the first decline in four months.
- Deloitte’s Q2 Survey of Chief Financial Officers found that they expect median earnings growth of 5% (a mean of 6.5%) over the next 12 months — the slowest rate in five years.
As you can see, the forecasts are a mixed bag, but indicate that the economy will pick up gradually the rest of the year, but stay below 3% for the year, Chow said. Americans have been saving more money and shown little inclination to sharply increase spending. Still, most economists expect spending to accelerate, even if just modestly.
Early Warning Signs
Chow listed a few potential issues that may impact the economy later in the year:
- Congress may need to raise the debt ceiling in November to December period as Treasury Secretary Jack Lew will run out of “extraordinary measures” to maintain the current ceiling.
- Will the Fed raise rates in September and by how much?
- How will a slew of Obamacare penalties and taxes affect consumer and small business spending? The latest one started on July 1st — a penalty of $36,500 a year per employee for a small business that reimburses employees the cost of their insurance premiums or health care costs directly. More penalties, fees and premium hikes will take effect in 2016.
Business spending on trade shows will likely remain steady for rest of 2015. However, there seems to be a lot of consumer headwind towards the end of the year that may impede attendance growth. Just don’t count too much on Europe or China.
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