Sometimes final grades don’t tell us much about true performance. Take the supposedly slowing U.S. economy.
The government’s official report card on economic growth, known as gross domestic product, is likely to show the economy turned wobbly in the spring. Except that it almost certainly didn’t.
Economists polled by MarketWatch predict GDP growth slowed to 2.1% annual pace in the second quarter from 3.1% in the first three months of the year. Ditto for Macroeconomic Advisors, perhaps Wall Street’s premier forecasting firm.
Yet the details of the report, due on Friday July 26, are likely to tell a very different story.
The increase in what consumers spent, for example, could surge above a 4% for the first time in five years. That’s a big deal, since 70% of what goes on in the economy is tied to consumer spending.
By contrast, consumer spending rose less than 1% in the first quarter. Very tepid.
“We expect to see signs of strength in consumer spending — much stronger than the first quarter,” said David Donabedian, chief investment officer of CIBC Private Wealth Management.
What gave a short-lived boost to first-quarter GDP was a surprisingly smaller trade deficit and a spike in inventories that occurred, perversely, because households briefly curbed their spending ways after the holidays. Not a good thing.
The switch will be flipped in the second quarter.
The surge in consumer spending —a huge bright spot — will be offset by a bigger trade deficit and lower inventories.
So the economy is doing great, right? Well, not exactly. The U.S. is growing at a steady pace right now, but storm clouds are a gathering.
The economy’s biggest soft spot is in manufacturing. The ongoing trade fight with China has hurt U.S. exports, forced American firms to scale back production, and spurred them to seek new suppliers.
Investment has also taken a hit. Business spending, the second largest source of U.S. economic growth, appeared to slow considerably in the second quarter.
Less noticed but perhaps just as worrisome, the Trump administration’s trade fight with China has hurt the global economy by disrupting the movement of goods. It may come back to haunt the U.S.
“What starts in the manufacturing sector won’t stay in manufacturing sector; it will eventually spill over into the service and technology sectors as well,” argued chief economist Scott Anderson at Bank of the West. “The combination of slowing global growth and disrupted supply chains from the trade wars will surely dent corporate profitability.”
These worries explain why the Federal Reserve is about to cut already low U.S. interest rates even with U.S. stock markets
setting fresh record highs and the unemployment rate at a nearly 50-year low of 3.7%.
Truly we are in uncharted waters. The Fed has never cut interest rates under these circumstances.
Will a small rate cut be enough to soothe all the anxiety? Don’t count on it. The trade fight with China shows no end in sight and a divided Washington is unlikely to do much to pitch in to help.
“The bigger picture is that the U.S. economy is gearing down after last year’s big fiscal push as well as last year’s string of rate hikes,” contended Douglas Porter, chief economist at BMO Capital Markets.
It’s all on consumers now.