Economies in China and Europe are faltering. But where is the US economy heading?

There is no shortage of economic indicators pointing to continued weakness in China and the euro zone. On Monday, the publication of data on Chinese car sales – which in 2018 suffered their first annual decline since the early 1990s – showed that passenger vehicle wholesale sales fell by almost 18 per cent year on year in January, the sharpest drop since the market began to contract last July.

The bleak figures came on the heels of data showing that producer prices slowed in January for the seventh straight month, adding to fears of deflation and putting further strain on industrial profits.

In the euro zone, which is becoming the focal point of anxiety among investors because of concerns that policymakers are underestimating the severity of the slowdown, survey data published by IHS Markit earlier this month revealed that growth has slowed to its weakest level since mid-2013. Germany, the region’s largest economy, which narrowly escaped a recession last year, is expected to grow by just 1.1 per cent this year, while Italy, the bloc’s third-largest, is already suffering a contraction in output.

Yet while China and Europe are at the centre of a global growth scare that contributed to sharp declines in asset prices at the end of last year, it is America’s economy that is the source of the greatest uncertainty in markets.

It is no coincidence that US stocks have proved more volatile than their global peers since last October. Having suffered its worst December since 1931, the benchmark S&P 500 index roared back last month, enjoying its best January since 1987, according to data from the Financial Times. The sharp swing stemmed partly from the Federal Reserve’s U-turn on monetary policy. Having signalled further rises in interest rates this year at its meeting just before Christmas, the Fed abruptly changed course late last month, putting its rate-hiking campaign on hold mainly because of mounting threats to global growth.

The Fed’s volte-face, while buoying investor sentiment, particularly towards emerging markets, has accentuated concerns about the health of America’s economy.

In the last week alone, fresh data revealed that retail sales in December suffered their steepest year-on-year fall since 2009, while industrial output unexpectedly contracted last month. Another less publicised yet more worrying sign that America’s economy is faltering is the surge in delinquencies on auto loans, with the default rate as a share of economic output rising to its highest level since 2012, according to data from Bloomberg.

Wall Street analysts have also become increasingly bearish, in stark contrast to the bullishness over the past two years, which was fuelled in part by US President Donald Trump’s corporate tax cuts. Having reported profit growth of more than 20 per cent in 2018, according to FactSet, S&P 500 companies are expected to suffer a decline in earnings per share in the first quarter of this year – the first year-on-year fall since 2016. Some analysts are even forecasting two consecutive quarters of profit declines, which would qualify as a recession.

In a sign of the extent to which sentiment towards US equities has soured, American stocks are now the second-least favoured region after Britain, according to the latest fund manager survey published by Bank of America Merrill Lynch last week.

However, investors’ mounting concerns about America’s economy stem more from confusion than anything else. For every major piece of negative data, there is at least one other indicator suggesting growth is holding up.

A survey of consumer sentiment – an important gauge given that household spending accounts for 70 per cent of America’s economy – published last Friday revealed that confidence remained elevated at the start of this month, with one measure showing consumers were the most optimistic about their finances since 2004. This is mostly a result of America’s red-hot labour market, with hiring rising at its fastest pace in nearly a year last month amid a pickup in wage growth.

What is more, fears about a recession, which were rife when US stocks were in free fall late last year, have dissipated as this year’s rally in equity and corporate bond markets has gained momentum. This suggests that financial turmoil – as opposed to a slowdown in the economy – is the real threat.

The Fed itself is fuelling the uncertainty by signalling that the next move in rates could be up or down. On Wednesday, the central bank published the minutes of its meeting last month when it put further rate increases on hold. While policymakers attached more importance to the risks to global growth, they left open the possibility of another hike this year if America’s economy remains firm.

Evidently, it is not just markets that are confused – the Fed is too.

While the slowdowns are incomparably more severe in China and the euro zone, the biggest question marks right now hang over the performance of America’s economy in the coming months.

Nicholas Spiro is a partner at Lauressa Advisory