In The Headlines
Life after Brexit: Potential Impacts for the U.S. Economy
Voters in the United Kingdom chose to exit from the European Union (EU). The move, commonly referred to as Brexit, is expected to jolt the U.S. economy, rattling financial markets and driving up the value of the dollar. It could also weaken U.S. diplomatic leverage in Europe and upend the corporate strategies of U.S. companies based in London. Below are a number of the concerns that policymakers, economists and financial analysts have about the fallout from Brexit.
Trade disruption from a break-up of the European Union – One of the key global concerns rattling the markets is that Britain could be just the first of more EU countries to leave the union. Maine Le Pen, French right-wing political leader, called for France to hold its own referendum vote. Concerns have been raised about the possibility of referendums in Italy and the Netherlands. The European Union is one of the world’s largest trading blocs and it is a major trade partner with China and the United States. If it breaks up, it could lead to global uncertainty, and many trade deals would need to be restructured.
Volatile markets impede U.S. growth – American consumers make up the majority of U.S. economic activity. If they do not spend, the economy does not grow; how much they spend often depends on how confident they feel about where the country is heading. Brexit is already causing severe volatility in global stock markets. If that volatility continues for weeks and months, it could cause American business owners and consumers to reconsider their spending plans. “The keys to whether the U.S. economy is affected significantly will be whether equities tumble enough to have a major impact on business and consumer confidence,” said Jim O’Sullivan, Chief U.S. Economist at research firm High Frequency Economics. A cutback by consumers would be particularly bad news at the moment. U.S. job gains have slowed this spring and economic growth was sluggish in the winter. But a recent pickup in consumer spending has been one of the few economic bright spots. The added momentum in spending had raised hopes that growth would rise in spring and summer.
Brexit triggers a strong dollar, which hurts U.S. trade – A strong dollar sounds good—and it is for American travelers—but it is bad for U.S. businesses that sell products overseas. A strong dollar makes a company’s products more expensive, and as such, less attractive, to buyers outside the U.S. This hurts sales for tech giants like Apple, equipment makers like Deere and Caterpillar, and global brands like Coca-Cola and Nike. “The biggest impact economically is the dollar impact,” said Matt Lloyd, Chief Investment Strategist, Advisors Asset Management. “If the dollar surges on Brexit for any period of time, then you’re going to see fears of the profits recession lasting longer.” A stronger dollar typically lowers U.S. exports, which could hurt the U.S. manufacturing sector. On the flip side, a stronger dollar could make imported items cheaper for U.S. consumers, potentially helping to offset consumer fears about volatile global markets.
Brexit forces the Fed to rewrite its rate hike playbook – In December, the Federal Reserve (Fed) projected that it would raise rates four times this year—a strong sign that the U.S. economy had recovered from the Great Recession. Higher interest rates benefit savers, who can make more money on deposits. But by June, several Fed committee members were only calling for one rate hike in the wake of weak growth and slowing job gains. If the volatility in markets resulting initially from the Brexit vote continues, and if U.S. consumers pare down spending, and employers hold back even more on hiring, the Fed could be looking at no rate hikes in 2016. In fact, markets are starting to increase their expectations for a rate cut this year. Other central banks around the world have lowered rates into negative territory, and the conversation has shifted to whether the Fed should consider that move too. “For the Federal Reserve, the Brexit vote makes it more difficult to raise interest rates,” says Senior International Economist Bill Adams at PNC Financial Services.
Brexit could impact strategic and diplomatic initiatives – Washington is concerned that Brexit will cause strategic and diplomatic rifts between the U.S. and many of its closest global allies. “If they are no longer part of the European Union that means they don’t have a seat at the table when the European Union makes difficult decisions,” said Wendy Sherman, Lead Negotiator for the Iranian nuclear talks, and former Undersecretary of State. Brexit could also distract the Continent at a critical time, undermining U.S. strategic interests. The referendum could cause “a period of inward-looking by the European Union,” said Ms. Sherman, who is now a Senior Counselor at the Albright Stonebridge Group. “That means they are less able to deal with Ukraine, less able to deal with the pressures from Russia, and less able to deal with transnational issues like migration, refugees and counterterrorism.” President Obama said that the U.S. would seek to preserve its diplomatic, strategic, and economic relationships with its closest allies. “The United Kingdom and the European Union will remain indispensable partners of the United States even as they begin negotiating their ongoing relationship to ensure continued stability, security, and prosperity,” Mr. Obama said after the Brexit vote. Analysts say a critical element of U.S. security policy in Europe, the North Atlantic Treaty Organization (NATO), is not likely to suffer from Brexit. The UK’s membership in NATO “remains a vital cornerstone of U.S. foreign, security, and economic policy,” the President said.
Whatever the short-term and long-term impact of Brexit, it is likely to be some time before the UK completes the negotiations involved in leaving the European Union (EU). No action will be taken before current Prime Minister David Cameron steps down in October. After that, the process of disentangling from the European Union could take anywhere from two-to-ten years, according to analysts. Matthew Peterson, Chief Investment Strategist for Boston-based brokerage firm LPL Financial, said the long, uncertain process of disentangling the UK from the EU “means that any impact on the economy will be months or years in the future.”
Citations
1. http://cnnmon.ie/28TbzRY – CNBC
2. http://on.wsj.com/28UHq8z – Wall Street Journal
Google Aims to Supercharge Broadband with Webpass Technology
Google Fiber announced recently that it would acquire Webpass, a wireless service provider, in a deal that could increase its ultra-high speed internet service in major cities. Using the Webpass wireless broadband technology, Google Fiber plans to bring ultrafast 1Gbps broadband service to millions of people in cities throughout the US. While neither company has disclosed details of the transaction, the deal is expected to close this summer after regulatory approval.
Francisco-based Webpass says it has tens of thousands of customers and a foothold in over 600 buildings across the country, including both residential and business buildings. The company uses a combination of rooftop wireless networks connected to high-speed fiber connections to deliver broadband connections that it claims can be as fast as 1 gigabit per second (Gbps). The company is already operating in five major markets, including the San Francisco Bay Area, San Diego, Miami, Chicago and Boston. Google Fiber, a subsidiary of Google parent company Alphabet, revealed earlier this year that it plans to deploy its 1Gbps broadband service in San Francisco, and it has already listed Chicago and San Diego as potential future cities. The acquisition of Webpass should help accelerate those plans and could help Google Fiber push into other cities.
“By joining forces, we can accelerate the deployment of superfast internet connections for customers across the US,” Webpass President Charles Barr said in announcing the deal. “Webpass will remain focused on rapid deployment of high-speed internet connections for residential and commercial buildings, primarily using point-to-point wireless.”
Since 2010, when Google first announced plans to build a fiber network, the company has challenged phone and cable operators to deploy affordable ultra-high speed broadband. But the build-out has been relatively slow. Google started in Kansas City and now offers service in two other cities, Austin and Provo, Utah. It is building service in Nashville and Atlanta, and has several other cities on its deployment road map.
Building a fiber-based network is expensive and time consuming. Streets need to be dug up to lay the fiber infrastructure. By contrast, point-to-point wireless connections that use high-frequency spectrum or airwaves can deliver high-speed access at a fraction of the cost, because all that is needed are radios and receivers mounted atop buildings. These networks can be set up within days rather than the weeks and months often required with a fiber deployment.
Though there are technical challenges associated with these wireless networks, they have been used for years to deliver dedicated data connections to businesses in cities like New York, Chicago, and San Francisco. Webpass is among a growing list of providers extending this technology to residential customers. Like Google Fiber, it is offering high-speed service at affordable prices, selling a 100Mbps- to-1Gbps service for $60 a month. Google Fiber’s 1Gbps broadband offer is $70 a month.
Barr said the news is good for its existing customers because the companies share a similar vision of offering a “high quality internet connection to as many people as possible.” He added, “Google Fiber’s resources will enable Webpass to grow faster and reach many more customers than we could as a standalone company.”
Citations
1. http://cnet.co/28VcKRp – CNET
2. http://usat.ly/28XDV1M – USA Today
The Good News Is . . .
• U.S. sales of existing homes rose in May to a more than nine-year high as improving inventory increased choice for buyers, suggesting the economy remains on solid footing despite a sharp slowdown in job growth last month. The National Association of Realtors said existing home sales increased 1.8% to an annual rate of 5.53 million units last month, the highest level since February 2007. Sales were up 4.5% from a year ago. Existing home sales surged 4.1% in the Northeast, climbed 4.6% in the South, and rose 5.4% in the West. In the Midwest, sales tumbled 6.5%, following recent hefty gains.
• Adobe Systems, Inc., a leading producer of digital media software, reported earnings of $0.71 per share, an increase of 47.9% over year-earlier earnings of $0.48 per share. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $1.4 billion, an increase of 20.4%. Management attributed the company’s results to strong growth in its cloud solutions business segment.
• Revlon said it was buying Elizabeth Arden for $419.3 million in cash, a deal uniting two well-known names in cosmetics. The companies value the deal at $870 million, including debt. Revlon is paying $14 for each Elizabeth Arden share. Revlon said the combined company would benefit from having a presence in more markets worldwide and estimated savings of $140 million from the combination. Elizabeth Arden opened her first Red Door salon on Fifth Avenue in 1910. The company, now based in Miramar, FL, sells skincare products and fragrances in 120 countries. It posted a loss of $28.4 million on revenue of $191.9 million in its most recent quarter. Revlon was founded in 1932 with the release of its nail enamel. This year, it posted a first-quarter profit of $11 million on sales of $439.6 million.
Citations
1. http://bit.ly/28N6ueI – Natl. Assoc. of Realtors
2. http://cnb.cx/1gct3xa – CNBC
3. http://adobe.ly/28UiRbB – Adobe Systems, Inc.
4. http://nyti.ms/294iKd9 – NY Times Dealbook
Planning Tips
Tips for Building an Emergency Fund
Many Americans are woefully ill-prepared for an unplanned expense, so much so that a whopping 66 million U.S. adults have zero dollars saved for an emergency, according to a recent survey of 1,000 adults. Currently, 47% of Americans said they either could not afford an emergency expense of $400, or would cover it by selling something or borrowing money, according to a separate report by the Federal Reserve Board’s Division of Consumer and Community Affairs. Below are some tips to help you start or build your emergency fund. Be sure to consult with your financial planner to determine how much you should have in an emergency fund, and how to create one that is appropriate for your situation.
Set your goals – Decide how much you want in your emergency fund and figure out how much you can put in each month. Then, simply determine how long it will take to reach your target based on your monthly contribution. Breaking it down this way can make saving for your emergency fund and other goals more manageable.
Start small, build up, and be consistent – Building your emergency fund does not have to be daunting. Start small, saving $1 a day for one week. At the end of the week you will have $7. Then, increase the amount to $2 a day for the next week and add that $14 to your initial $7 bringing your total up to $21, then increase daily dollar amount in each subsequent week to $3, $4, etc. If the maximum you can save is $10 a day for a week, just stay at this number and continue this for a year. At the end of the year you would have saved $3,325. Consistently saving money, albeit seemingly small, can make a huge impact in building your emergency fund and providing you with a safety net.
Save your tax refund – About 75% of taxpayers received a refund last year, and the average amount was $2,913. A refund of that size can get your emergency fund off to a great start. Open an interest-bearing savings account and have the money directly deposited into it so you will not be tempted to use it.
Keep your change – When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account. Also, if there is money left at the end of a pay period, move some into your emergency fund. These small steps can add up.
Make your emergency fund payments automatic – Schedule regular payments from your checking account to your emergency fund, using automatic bill payment plans. You might also be able to have a portion of your paycheck diverted to your emergency fund. This way you do not have to remember to do it yourself every month.
Citations
1. http://bit.ly/1C4buSR – US News & World Report
2. http://bit.ly/QwbWJm – Kiplinger
3. http://bit.ly/1izCvKC – Bankrate.com
4. http://nerd.me/28Ub6jp – NerdWallet.com
5. http://bit.ly/1LHNGOW – MoneyCrashers.com
