Growth eased a bit as the expansion entered its record eleventh year in July as manufacturing activity slows further – in part from the expanding trade war between the U.S. and China. See Nationwide Economics’ take on what's happening and why this month in the economy.
The equity market selloff that started the previous week intensified early last week as China responded to the latest round of U.S. tariffs by allowing the yuan to depreciate and stating intentions to cease U.S. agricultural purchases. While trade tensions remain at a fever pitch, major domestic equity indices had rebounded with most posting only slight declines for the week.
As expected, the Fed cut the target range for the federal funds rate. But there were lots of unexpected crosscurrents. First, the Fed also stopped its quantitative tightening (QT) program two months early. Second, the Fed only cut by 25 bps, not the 50 that many market participants hoped for. And third, Chair Powell noted that this was more of a mid-cycle insurance cut rather than the start of an easing cycle as might occur at the start of an economic downturn.
The economy slowed from the first quarter’s rapid pace with annualized real GDP growth of 2.1 percent for the second quarter. Consumer and government expenditures both grew strongly — offsetting a small decline in business fixed investment, a weakening for net exports, and a substantial slowdown in inventory accumulation. Year-over-year growth in real GDP also downshifted to 2.3 percent, the slowest pace in nine quarters but right about the average for this record-long expansion.
Despite better data for jobs and retail sales, the annualized pace of real GDP growth for the second quarter still slipped to 2.1 percent as manufacturing, trade, and inventory accumulation all slowed. Still, there are only small signs of a downturn as the expansion enters its record 11th year.
Retail spending was better than expected for June with total retail sales up by 0.4 percent. Core retail sales (excluding autos, building supplies and gasoline) grew at an even faster pace – with a 0.7 percent gain as strength across several categories offset a drop at gasoline stations as prices dropped. The 12-month growth rate in core retail sales accelerated to 4.5 percent for June, far surpassing the meager pace of inflation.
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