Economic Outlook - October 2019
- U.S. economic growth slowed in the second quarter, updated figures confirm, and slow growth should persist through the end of the year. GDP grew at a 2% annual pace from April through June, unchanged from the previous estimate. Consumer outlays account for almost 70% of all U.S. economic activity in the U.S. and households have been supported by the strongest labor market in years, delivering rising wages and an extremely low unemployment rate. Economists and the Federal Reserve predict U.S growth of about 1.8-2.0% in each of the final two quarters of 2019.
- Manufacturers in the U.S. and abroad have faced softening demand and more canceled orders as they struggle to cope with a global economic slowdown made worse by trade war impasses. The Institute for Supply Management (ISM) said its manufacturing index fell to 47.8% last month from 49.1%, marking the lowest level since June 2009. The General Motor’s strike has had a yet to be quantified impact on these calculations. Economists had forecast the index to reach 50.2%. The decline in the index raised the specter of recession, turning investment market sentiment lower. Readings over 50% signal business conditions are getting better, below 50% indicates they are worsening.
- The Federal Reserve approved a much-anticipated quarter-point interest rate cut on September 18, but offered few indications that further reductions are ahead, as members remain divided on what to do next. Following its two-day policy meeting, the central bank announced that it would take down its benchmark overnight lending rate to a target range of 1.75% to 2.0%. That drop comes nearly two months after the policymaking Federal Open Market Committee went ahead with its first cut in 11 years. The weak September ISM report has, however, increased the odds that an October cut may be forthcoming to help bolster economic growth.
- Rising discretionary incomes growing from the strong job market have given Americans the ability to keep buying cars, dine out, and splurge a little. The economy will be firm so long as this remains the case, but the trade war with China has put businesses on edge and contributed to a slowdown in hiring. Additionally, consumer spending appears to be decelerating after the spring run-up in hiring. Evidence of worry shows in slipping consumer confidence reports in September, underscoring the risks of a trade conflict that has harmed manufacturing and farming exports, and poses a threat to a record U.S. economic expansion. The consumer confidence index fell to a three-month low of 125.1 from 134.2 in August while economists had forecast 131.1. The decline puts confidence at the lowest level since June and it is well off the post-recession peak of 137.9 set a year ago.
- Inflationary pressures remain tempered. The core rate, seen as a measure of underlying inflation, edged up to 1.8% from 1.7%, well below the Fed’s 2% target. The Federal Reserve has preferred to use the PCE price gauge, which was flat for the month. The Labor Day holiday soaking by Hurricane Dorian appears to have hampered spending in August and early September in parts of Florida, Georgia and the Carolinas. (The Southeast may benefit in the longer term by helping to rebuild parts of the Bahamas devastated by the storm.) Another potential depressant to inflationary pressure was the President’s announcement that he would raise tariffs, prompting a temporary drop in U.S. stock markets, souring shoppers’ enthusiasm and sparking discounting.
Sources: Bloomberg LLC, FactSet, U.S. Department of Labor, Dow Jones
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