– July 15, 2016

Brexit’s impact on the U.S. economy is likely to be contained.
Article 50 of the Treaty on European Union allows a two-year window for negotiating a member country’s withdrawal. This can be extended by mutual agreement. The window doesn’t open until a member state submits a formal request (which the U.K. has not yet done). In the meantime, little has actually changed for the global economy. So far the financial markets have reacted (overreacted?), and the political system in the U.K. has begun to change to reflect the will of the people as expressed in the Brexit referendum, as it should.

For the U.S., the fallout is likely to be contained and could ultimately be constructive. In terms of the U.S. economy, the short-term impact has been volatility in the markets, a net drop in Treasury yields, a mild strengthening of the dollar, and a slight fall in equity markets.

The stronger dollar is likely to hurt U.S. exporters. However, slow global growth and a stronger dollar have already taken their toll on exports. Weak exports over the past couple of years have already pushed their share of GDP down to 12 percent from 13.5 percent. In terms of GDP growth, exports have contributed less than 0.5 percentage points to growth in five of the past seven quarters, including two quarters (A and B, Chart 2) when they subtracted from GDP growth. While exports can continue to fall, exacerbating recent performance, the U.S. economy already depends less on exports for growth, and that should soften the impact of future declines.

Finally, a nearly unanimous refrain is that a higher degree of uncertainty could delay decisions on hiring and investment. But some investors, business people, and entrepreneurs have likely already started to search for new opportunities to profit. Therein lays the strength and resilience of a free-market system. For both groups, the process is likely to be quite drawn out.

Economic Outlook
The Leaders index in our Business-Cycle Conditions model fell slightly in the latest month, with 46 percent of our leading indicators trending upward. This result follows a neutral 50 reading in the prior month.

The small decline to below the 50-percent threshold once again raises concern over the durability of the current expansion. AIER researchers judge the risk of recession to be somewhat elevated but do not see a recession as likely in the near term.

Four of our Leaders were trending higher in the latest month. Among those, two were consumer related: real new orders for consumer goods and real retail sales. This is consistent with our view that a solid labor market would continue to support consumer spending. The weak May jobs report casts a shadow over that hypothesis, but a strong rebound in the June report has since erased much of that. Still, healthy job gains will be critical for sustaining the current expansion. Two financial indicators, the Treasury-yield spread and real stock prices, were the two other upward-trending indicators last month. Among the remaining indicators, five were trending lower while three were neutral.

The percentage of expanding coincident indicators held steady in the latest month, registering 75 percent for the fifth month in a row. Among the Coinciders, four were trending higher while one was trending lower and one was neutral. The proportion of lagging indicators expanding rose to 100 percent from 92 percent in the prior month (Chart 3). 


Click for interactive Indicators at a Glance (on mobile device turn to landscape)

Next/Previous Section:
2. Economy
3. Inflation
4. Policy
5. Investing
6. Pulling It All Together/Appendix


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