Weekly Market Update – 02 September 2019

USA ECONOMIC OUTPUT

Still plodding on

Last week, the Bureau of Economic Analysis (BEA) released its revised estimate for growth during the second quarter, indicating that US gross domestic product increased at a rate of 2.0% rather than 2.1%. A downgrade isn’t quite as happy an occasion as an upgrade but 0.1% is neither here nor there, though it does confirm a sharp deceleration from the 3.1% increase in output growth during the first quarter.

The bright spot in the US economy remains the consumer, just as it is in the UK. Indeed, the BEA’s Personal Incomes and Outlays report, also released last week, evidences strong household spending in July in particular. That being the case, the current record-long expansion might well persist a while longer. Indeed, third quarter growth on a par with that in Q2 feels about right.

In fact, our expectations are pretty much in line with the consensus. The Wall St Journal’s monthly survey of economists outlines similar predictions between a low of 1.9% and a high of 2.3%. Mind you, the economist herd is a little spooked by the recent yield curve inversions; the average response on the likelihood of a recession in the next twelve months or so has charged toward 34%, up from 18% at the same time last year. Joel Naroff, of Naroff Economic Consulting, is in the lead with a comparatively pessimistic 65% chance. We think that he is driven by a belief that the Sino-US trade war will ‘continue for an extended period and is likely to ramp up’. That is an entirely reasonably belief of course, even if you might disagree with the extent to which the US economy will suffer. The stragglers include, Brian Wesbury, Chief Economist at First Trust Portfolios. He sees the chance of a recession as low as 10% . Presumably 0% felt just too darn bullish. He argues that the cost of the tariffs imposed on China by the US (and vice versa) will be mitigated as production moves away from
China.

His argument is sound – it is Chinese-produced goods that are being targeted, not the goods per se. The same goods sourced from other countries will escape the hiked tariffs.

USA INFLATION

Still off a little

The Federal Reserve’s preferred measure for inflation is the Personal Consumption Expenditure price index. The BEA calculates a 1.4% increase in the year to the end of July, up from 1.3% in June. Save for some time last year, PCE has undershot the 2.0% target for much of the last seven years. That, allied with moderate economic growth at home and near static growth abroad, is why market participants are predicting with near certainty that the Federal Reserve will reduce the target for the Fed Funds rate at the next opportunity on 18th September.

And while we remain thoroughly unconvinced of the need for lower rates, we’re not betting against the consensus on this one.