Widening Divergence in Global Economies

Jeffrey Roach (00:04):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, and in this edition I'll highlight a couple charts that explain what's driving business and consumer activity. First, the U.S. has potential for growing above trend. The latest Now Casting results suggest a fairly mixed global growth picture. So, the United States and the Euro area currently stand out as the economies with the greatest potential to outperform their respective trend growth rates in the near term, reflecting resilient demand and improving momentum across key sectors. And that's in contrast to the United Kingdom and China, which appear to face the greatest downside risks, with growth tracking below trend as ongoing structural and cyclical headwinds weigh on activity. Taken together, the results point to a widening divergence in the global economy where stronger near term performance in the U.S. and Euro area contrast with softer conditions in the U.K. and China. This is an important concept to track for companies particularly exposed to these countries.

Jeffrey Roach (01:08):

Second, keep a watch on labor flows. Monitoring labor force flows is especially important right now because headline employment numbers can sometimes mask important shifts happening beneath the surface. One of the more interesting dynamics in recent months has been the growing number of people moving from unemployment into non-participation. That is individuals who are unemployed and actively looking for work, but have since stopped searching altogether. Now, while these workers remain without a job, they're no longer counted as part of the labor force because they're not actively seeking employment. This distinction matters because a declining unemployment rate can sometimes reflect workers leaving the labor force rather than finding jobs. Tracking these flows helps provide a clearer read on labor market health, worker confidence, and the balance between labor demand and labor supply. If more unemployed individuals continue to exit the labor force, rather than transition back into employment, it could signal a softening labor market that may not be immediately apparent in traditional headline indicators.

Jeffrey Roach (02:18):

So, keeping an eye on this metric could help investors and policymakers stay ahead of the curve when assessing the path of interest rates and anticipating the Fed's next move. Third, could prices begin to decelerate again? The June ISM services report paints a picture of an economy that continues to grow at a healthy pace, even as some of the temporary tailwinds begin to fade. Businesses appear to be largely finished rebuilding inventories, suggesting inventory accumulation is unlikely to provide much support to second quarter GDP. Even so, growth should remain above trend, supported by strong consumer spending and ongoing investment in AI-related CapEx. The report also pointed to firm labor demand with World Cup related hiring likely helping lift the employment index. Meanwhile, input price pressures eased noticeably, falling to their lowest level since February. Reinforcing the view that recent inflation pressures may actually prove temporary rather than persistent. Beneath the headline numbers, demand remains particularly strong across several services industries. Healthcare providers continue to report robust patient volumes and revenue growth despite lingering inflation concerns, while infrastructure projects are sustaining solid business activity. Retailers also described stronger than usual sales for this time of year. Bottom line, as tariff uncertainty and geopolitical tensions continue to ease, inflation dynamics should improve further, however, the economy still appears resilient enough that the Fed is unlikely to abandon its relatively hawkish stance anytime soon. Now that's all for now. If you want more insights, follow us on social media and take care.