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.
Although inflation appeared set to rise broadly just a few months ago, recent data confirm that consumers have just said no to higher prices.
Rising quits, stagnant wages
As the labor market improves, workers typically feel empowered to quit their jobs for better-paying opportunities. While quits are on the rise today, better pay is hard to find.
The new consensus trade
Emerging markets have soared so far this year. While there is much to like about the asset class against the backdrop of weak global interest rates, there is much that argues for a healthy dose of caution.
About the macro report
The Macro Report is written by members of Putnam’s Fixed Income team. With backgrounds in applied economics, currency and interest-rate analysis, and sovereign and local bond market dynamics, this group conducts macroeconomic research in support of Putnam’s global fixed-income strategies.
Michael Atkin, Portfolio Manager
Investing since 1988
Sovereign debt, global growth analysis
Albert Chan, CFA, Portfolio Manager
Interest-rate derivatives, government debt, risk analysis
Onsel Emre, PhD, Analyst
Inflation, risk analysis, global growth dynamics
Sterling Horne, Analyst
Politics and economics
Irina Solyanik, CFA, Analyst
Quantitive analysis, growth forecasting
Izzet Yildiz, PhD, Analyst
Labor market analysis, global growth dynamics