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August Monthly Dashboard: The cavalry is riding over the hill

  • illustration of future scorecard

Monthly Review (Page 3)

Consumers continue to hold up the economy (both in the U.S. and the world) despite rising risks from trade/tariff disruptions and unsettled financial conditions. Retail sales have improved in recent months on the back of rising incomes, solid (albeit slowing) job gains, and record household net worth. Moreover, lower interest rates are inducing a sharp rise in mortgage refinancing and some early increase in home sales activity. But all is not good, as growing concerns about tariffs and trade are beginning to hold back business activity, especially for manufacturing, while consumer prices may be starting to climb in response to tariffs. Anxiety about trade, currencies, and global growth sent equity markets sharply lower in August and caused an investor run on U.S. Treasuries — lowering yields for long-term interest rates to near expansion lows. The yield curve slipped closer to a full inversion, further worrying financial markets.

Outlook (Page 4)

The outlook for Fed easing has shifted quickly in response to deepening concerns about growth across the industrialized world and further escalation of the trade war between the U.S. and China. We now expect the Fed to ease a couple of more times this year (with more easing in 2020) in order to prevent weaker business activity and capex spending from disrupting the otherwise healthy economic expansion. Despite expanding downside risks, the odds a downturn over the next year remain below 50 percent given the positive trends shown by consumers (and the lack of a decisive recession signal from the yield curve). If Fed easing over the rest of 2019 can calm financial conditions, steepen the yield curve, and buoy the business sector, the prospects for continued growth remain good. Trade negotiations remain a wild card, however, and a worse turn would add to the negative sentiment building for the economy.

Go deeper with the full August dashboard linked below.

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