The Economy Is Still Vulnerable. Trade Could Be a Refuge.


Only a year ago, trade was a big worry for investors, and the strong domestic economy a source of comfort. How times change.

The median estimate among analysts is still that the U.S. economy will expand 4% in the final quarter relative to the third. Vaccines under development also raise the prospect of a quicker end to the pandemic, which could help unlock some extra capital spending and hiring. But at the same time, signs of weakness are creeping into the labor market and Covid-19 cases are surging. In the eurozone, the economy is likely to contract again.

Amid so much macroeconomic uncertainty, investors should focus on what the latest data show: A widening gulf between the global export-oriented economy, which could soon get back to precrisis levels, and the more troubled, domestically focused one.

According to purchasing managers index surveys for November, published this week by IHS Markit , business activity in the U.K., the eurozone and Japan is shrinking again. Monthly changes in PMIs look tightly correlated to the recent rise in Covid-19 infections.

But under the headline figures, manufacturing output has kept growing at a healthy clip, even as the services sector has plunged back into crisis mode. In the eurozone and the U.K., the difference between the two PMIs was the widest in almost 25 years. Households have shifted some spending from services toward goods. Even in those nations that have re-enacted strict lockdowns, like France, the industrial sector has been encouraged to keep producing.



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