Changing Growth Patterns

On August 6, it was reported that the U.S. external trade deficit fell to a near four-year low of $34.2 billion in June from May’s $44.1 billion and the consensus forecast of $43.5 billion. Originally, this unexpected result was thought to result from reduced petroleum imports; however, most of the decline was attributable to a significant contraction in the non-energy deficit.

The excellent results suggest that second-quarter GDP growth may have been meaningfully higher than the first estimate of a 1.7% annualized gain. Unless the narrowing of the deficit is fully reversed in July, it appears that third-quarter GDP growth is on pace to surpass the 2% mark.

The U.S is not the only developed country exhibiting higher-than-anticipated growth. The euro zone is also showing strength, led by the Germany and the U.K. Japan’s growth is also trending higher. At the same time, growth in developing nations appears to be decelerating, including China, Brazil and Russia.

For a time, in the industrial sector, BWFA favored companies that we believed would benefit from the rapid growth in emerging economies, particularly China. As a result of the change in growth patterns, we now prefer industrial companies that are more reliant on growth in developed markets.