'Brexit' fall-out: Winners and losers

June 30, 2016 | USA Today

The U.S. economy will likely take a modest hit from the United Kingdom’s vote last week to leave the European Union, but the episode is expected to produce some winners as well as losers.

The market turbulence generated by the referendum is already prompting some businesses to rethink hiring and investment plans. And manufacturers that were starting to stabilize after a prolonged slump face a new potential setback. But homebuyers may be dealt a favorable drop in mortgage rates, while U.S. business and property owners welcome a possible fresh stream of foreign investment diverted from the U.K.

Overall, though, the negatives are expected to outweigh the positives. High Frequency Economics has trimmed its estimate for U.S. economic growth in the second half of the year to 2.3% from 2.5%. Goldman Sachs has cut its second-half forecast to 2% from 2.25%.

Yet the fallout from the so-called Brexit is a moving target. Stocks pared their losses Tuesday, though the Standard & Poor’s 500 remains nearly 4% off its pre-Brexit level and further turmoil may await.

“I don’t think it’s a big deal for the U.S. unless the (European Union) splinters,” says Mark Zandi, chief economist of Moody’s Analytics. He notes the nearly double-digit stock sell-off early in the year, triggered by China’s slowdown, was far more significant.

Here’s a breakdown of some losers and winners:

Losers

  • Manufacturers. U.S. factories have been taking it on the chin for nearly two years with weakness abroad and a strong dollar hobbling their exports, and low oil prices damping orders for the steel pipes needed for drilling. Since January, the dollar has weakened while oil prices have risen, helping the sector regain its footing.

Since the vote, however, oil prices have dipped and the dollar has risen as much as 4% against a basket of currencies. “We were starting to see some signs of stability,” says Chad Moutray, chief economist of the National Association of Manufacturers. “This is a fly in the ointment.”

The U.K. accounts for only 4% of U.S. exports and 0.5% of U.S. GDP, according to Capital Economics. But the referendum will require the U.K. to renegotiate trade deals with the eurozone, which represents 15% of U.S. exports, behind only Canada and Mexico. And the vote has fomented fears that other European countries may follow the U.K. out of the EU. “It’s just one more headache,” Moutray says. Jim O’Sullivan, chief U.S. economist of High Frequency Economics, has revised down his forecast for U.S. export growth in the second half of 2016 to 1% from 2.5%.

  • Consumer and business confidence. While stock declines dent consumer confidence, consumption has been largely immune to sharp market gyrations, says Tom Porcelli, chief U.S. economist of RBC Capital Markets. Business confidence has been far shakier, with capital spending turning in its worst two-quarter stretch in seven years. “Business investment is probably the most vulnerable sector,” Porcelli says.

And while some large banks and technology companies are unfazed by Brexit, others are inclined to put new hiring projects on hold to see where the dust settles while moving ahead with plans to fill existing openings, says Jeanne Branthover, a partner in executive recruiting firm DHR International. That could further constrain job growth that slowed substantially in April and May.

  • Oil producers. Oil companies sharply cut back drilling activity after oil prices tumbled from more than $100 a barrel in 2014 to $26 early this year. Prices had climbed to about $50 a barrel before Brexit sent them down modestly to about $47 by Tuesday. A strong dollar puts downward pressure on oil, which is traded in dollars.

Winners

  • Homebuyers. The global turmoil has driven investors to the safety of U.S. Treasury bonds, pushing down the yield on 10-year notes. Thirty-year mortgages, in turn, averaged 3.56% Monday, according to Bankrate, down from 3.66% a week earlier, saving the holder of a new $200,000 mortgage about $144 a year.
  • Shoppers. A strengthening dollar could further cut already low import prices for U.S. shoppers.
  • U.S. property owners banks, tech firms. Brexit may prompt wealthy foreigners to sell U.K. real estate, spurring demand for U.S. properties, says Lawrence Yun, chief economist of the National Association of Realtors. Branthover says her large banking and technology clients hope for a similar shift in investment assets to U.S. companies.