Our 2017 Outlook, published in January, was called Passing the Baton. We anticipated a series of changing economic and market drivers – baton passes – across the global economy.  We felt investors had focused so much on political risk in the Eurozone during 2016 that the potential persistence of the economic and earnings recovery was underappreciated. Last week, the monthly surveys from companies around the world combined with the monthly employment numbers in the US suggest two things to us:

1. Growth momentum outside the US, especially in the Eurozone, is slightly stronger.
2. Absent the anticipated stimulus (tax cuts, infrastructure spending etc.), employment growth is slowing somewhat, as is car buying. That said, the US surveys are positive, as is employment growth. We expect growth to continue and await greater clarity from Washington.

In analysing the employment numbers, we take great care to recognize that monthly information on the labor market is volatile and seek to smooth it out. The chart below shows the two major US surveys with each of them smoothed out into a 3 month, 6 month and 12 month average. Looking at the last 6 years, the 12 month average has been pretty consistent at around 200,000 new jobs per month for both surveys. The payroll survey is from companies and is more widely publish, but it is the household survey that the Labor Department uses to calculate the unemployment rate, currently at the historically low level of 4.3% (see our chart on page 2).   

David Fuller's view

The Eurozone is currently experiencing at least a cyclical recovery from a very low trough.  This bodes well for the global economy.  However, European banks remain relatively weak and EU economies are overregulated. Most significantly, Germany remains adamantly opposed to fiscal union, without which no previous single currency among nations has survived.

Consequently, there are more questions than answers about the EU’s longer-term prospects.  Nevertheless, efficient Germany fares best within the Eurozone because it would have a less competitive currency if it returned to the Deutsche Mark.  

Here is a PDF of The Weekly View.