The Macro Report | June 2017

Calm before the storm


Increasingly, we believe we are witnessing late-cycle economic conditions emerge in the United States. The labor market is at or close to full employment, the positive contribution to growth from the ratio of new orders to inventories has ended, and banks are struggling to find customers for loans. This does not mean that a recession is imminent or likely, although it probably does mean that the odds of a recession are rising. There are policy risks to watch in the current environment, and there is also the risk that the private sector will react aggressively to the continuing squeeze in profit margins.

This month, we discuss some of the dynamics behind falling inflation, including corporations’ failure to restore margins by charging higher prices. On a separate note, we take a closer look at how EM assets have soared despite a downshift in local growth prospects and rising signs of economic and political disruption. China, we observe, continues to waste money on a colossal scale, and the country’s debt dynamics remain unattractive. Sooner or later, this could cause a major problem for investors.


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