Global Growth Hasn’t Run Dry

Which way is the world economy heading? After Q4 GDP reports showed slowdowns in the US, UK and China, many fret global growth is cooling. But what happened between September 30 and December 31, 2014, doesn't say what will happen in 2015 and beyond. More recent data don't support fears of a weakening world-the global expansion remains on fine footing, giving stocks plenty to like.

Take the US. When the preliminary Q4 GDP report showed growth basically halved as business investment slowed, folks feared gun-shy businesses would drag down future growth. But January purchasing managers' indexes (PMI) suggest otherwise. Manufacturing PMI cooled some, but its 53.5 reading was well above 50, considered the line between growth and expansion. Forward-looking new orders, which become tomorrow's production, hit 52.9-also slower, but also growthy. Nonmanufacturing PMI, which measures America's dominant service sector, accelerated to 56.7. New orders sped to 59.5, signaling broader demand growth across the biggest chunk of the US economy. There is no evidence here that businesses broadly are pulling back.

The story is similar in Britain, where a fall in North Sea oil output weighed on GDP in Q4. January's Manufacturing PMI rose to 53, driven by rising new orders. Construction, which also detracted from Q4 GDP, rose to 59.1. Services jumped from December's 55.8 to 57.2, driven by an acceleration in new projects. Here, too, data don't square with slowdown jitters. Most eurozone PMIs rose, too, countering fears the region is tipping back into recession. Composite PMI, which aggregates services and manufacturing for all eurozone economies, rose to 52.6 from December's 51.4. Eurozone services rose to 52.7, led by Germany (54.0), Spain (56.7) and Italy (51.2).

Not every PMI looked rosy, of course-there are always plusses and minuses. But not all of the "bad" news was so very bad. For example, China's official manufacturing PMI slipped to 49.8. But that isn't shocking considering the government's long-running efforts to address supply gluts and promote services as the main economic engine. The services PMI hit 53.7, in line with the recent trend. Moreover, no one country is the world-which is in overall fine shape, according to JP Morgan's global All-Industry PMI, which rose to 52.8.

PMIs aren't the only measure suggesting economic jitters are overwrought. Eurozone retail sales do, too, countering fears of a deflationary spiral. For months, we've seen warnings falling prices would trigger a "deflationary mindset," where consumers stop spending because they think they'll get a better deal later on. Well, prices fell in December, but December retail sales volumes rose 0.3% m/m (2.8% y/y). Spain, where prices have fallen since July, saw sales rise 1.1% m/m (6.6% y/y)! Granted, it's just one month (and backward-looking), but so far falling prices aren't quashing consumption.

While headlines paid plenty of attention to all of these positive releases, some iffier numbers also got lots of eyeballs. Namely, the Baltic Dry Index (BDI), which fell to 590 on Monday-a 60% drop from November 3. This index, which tracks costs, supply and demand for shipping raw materials, is widely considered a leading economic indicator-and got a credibility boost with its freefall in 2008. However, we wouldn't read too much into it, good or bad. One, today's levels are in line with levels seen during the 1980s and 1990s bulls. Two, the supply of container ships has skyrocketed in recent years, and that (plus falling oil prices), not cratering demand for resources, seems to be behind this fall-just as ship shortages and high oil prices drove the index's astronomical rise in 2007 and early 2008. Three, it's a fallacy to assume resource use correlates perfectly with growth. In infrastructure-driven developing economies-like those that dominated the 2002 - 2007 bull market-there is a pretty strong relationship. But in service-heavy Western economies, where efficiency gains are robust, the connection breaks down. Broader measures of cargo, like air freight volumes (up 4.9% y/y in December and 4.5% in 2014) and US intermodal rail carloads (up 0.9% y/y in January, hitting an all-time high), are more telling in this day and age.

Coverage of BDI does show where sentiment is, though-still flirting with skepticism. Fears exist and expectations are still plenty low, giving all this growth room to remain a positive surprise-and giving this bull market more wall of worry.

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