A tale of two economies: still solid job gains fueling strong consumer spending, especially for big ticket items, versus the trade war hitting primarily the manufacturing sector. Overall economic growth is slowing but only to around the long-term trend rate of the economy…at least for now. See Nationwide Economics’ take on what's happening and why this month in the economy.
The trend in consumer inflation remains soft even as the ultra-low unemployment rate and improved consumer spending point to tighter labor and product markets. Lower energy costs again held back the consumer price index (CPI) for September. A flat reading for the month kept the 12-month change in the CPI at a low 1.7 percent. Headline inflation readings could continue to swing with energy costs in coming months, especially given the elevated tensions in the Middle East at present.
Signs of a bifurcated economy continued last week, with business surveys lower, mixed news on the job market, and continued strength from consumers. Overall economic growth appears to be slowing, with most estimates for real GDP growth over the second half of the year now below 2.0 percent. Even so, recent data do not suggest that the economy has slipped into a recession – or that it is likely to in the near-term.
The geopolitical environment has been quite uncertain this year, helping to hold back economic activity. The choppy escalation of trade disputes between the U.S and China has hung over the business sector and helped to decelerate global growth. The Fed, which came into the year expecting further rate hikes, has reversed course with two rate cuts (and more likely on the way) in response to building risks for the economy, while the yield curve has been partially inverted since May – at a minimum suggesting slower growth ahead, if not recession.
The Federal Reserve eased again in September and we project a bit more easing by year-end as trade tensions and weaker global growth likely still hang over the economy. Our baseline outlook projects continued economic growth around trend, with inflation edging slowly higher — helping to keep long-term interest rates from falling further. But there is considerable uncertainty surrounding the path forward stemming from trade volatility – and most recently from domestic political events.
In line with expectations, the Federal Reserve cut the target range for the federal funds rate by an additional 25 basis points (bps) following the September FOMC meeting. The post-meeting FOMC policy statement cited the weakening global economic backdrop and still tepid inflation readings within the U.S. as impetus for additional policy easing. While mostly unsaid in the statement, the uncertainty caused by volatile financial markets and the further escalation of the trade war with China since the last FOMC meeting in July likely also influenced the decision to add stimulus to the economy.
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