Daily Brief: The Global Economy Is Getting Stronger And Stronger, But That’s Not All Good News

Daily Brief: The Global Economy Is Getting Stronger And Stronger, But That’s Not All Good News

over 2 years ago3 mins

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Crack out the unitard, because fresh data out Friday showed the global economy working up a sweat in May as activity levels jacked ever higher.

What does this mean?

Monthly business activity surveys ask managers all over the world just how busy they’ve been compared to the month before, giving observers a near real-time picture of economic performance. And with lockdowns easing, it seems everyone’s been rushed off their feet: manufacturing and services activity in both the US and UK not only rose compared to April, but they hit their highest combined level in any month ever. The eurozone wasn’t far behind, with overall activity increasing in May. And while the region’s manufacturing industry remains somewhat hamstrung by supply and labor bottlenecks, the easing of pandemic-related restrictions gave its services industries a major boost.

Firing on all cylinders

Why should I care?

The bigger picture: The economy’s on steroids.

Manufacturers’ costs have risen rapidly lately, partly because of shortages of things like microchips, and partly because hiring difficulties could be forcing firms to offer higher wages. That might sound great, but it raises two serious risks: lower company profits (and potentially share prices) and a drop in economic activity. Central banks have their ways of keeping a lid on those rising costs, but the mere whisper of interest rate hikes anytime soon would likely send investors scurrying away from the stock market.

Help wanted

For markets: European stocks or American stonks?

Big investors seem to think European stocks are the place to be right now: they’re set up to outperform their US equivalents thanks to cheaper valuations and stronger earnings growth. But in the long run, analysts agree it’s tough to ignore Big Tech stocks: consistently high growth from the likes of Apple, Facebook, and Amazon just isn’t available in Europe.

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Deere's Earnings Surged Past Analysts’ Expectations

Deere image

Deere posted better-than-expected earnings late last week, and ain’t y’all investors too kind, pushin’ the farm equipment-maker’s li’l ol’ share price higher.

What does this mean?

Deere’s worth paying attention to because it’s an economic bellwether, meaning demand for its products gives a good indication of how busy US farmers are keeping. So it’s a strong sign that the company’s profit surged 169% from the same time last year, and that it upped its expectations for the rest of 2021 for the second quarter in a row. That’s partly thanks to a recovering global economy in need of food production and construction equipment, and partly thanks to a surge in the prices of grains, which has given farmers more money to spend on new toys.

Crop prices
Source: S&P Global Market Intelligence, Danielle Alberti/Axios

Why should I care?

For markets: All the demand, none of the supply.

Deere did warn that it might struggle to secure necessary parts in the months ahead, and it’s not alone: manufacturers across a host of different industries are running out of the steel, plastics, and rubber they need for their products, as the economy picks up again and demand overwhelms supply. Microchips too: Cisco’s shares dropped last week when it warned its profit might be lower than analysts were expecting, with the lack of semiconductors pushing up prices of what’s available.

The bigger picture: Deere ain’t foolin’ anyone.

Deere might masquerade as a folksy, salt-of-the-earth type, but it’s actually an uncanny hybrid of industrial and tech company – with one investment manager even including it in their autonomous technology and robotics ETF. That’s because the company’s investing big into “precision farming” technology – from crop-surveying drones to soil-analyzing artificial intelligence – that’ll allow farmers to grow more with less water, fertilizer, and land. That’s a market with big potential: Morgan Stanley reckons precision farming could rake in $17 billion of revenue in 2030 – up from $5 billion in 2019.

Operating profit
Source: Deere
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