AIIS August 2019 Market Update

SEATTLE (Scrap Monster): The economic expansion slowed significantly in the second quarter, decreasing the likelihood of annual growth hitting the Trump administration’s target of 3 percent for the first time since 2005.

From April to June, the economy grew at an annualized rate of 2.1 percent, according to the Bureau of Economic Analysis, down from 3.1 percent during the first three months of the year. Growth during all of 2018 was 2.9 percent.

Q2’s 2.1 percent, though, was more than enough for the economy to set a record for the longest expansion in the nation’s history. The more than 10-year-long streak began in June 2009 following the Great Recession.

During that time, growth, while sustained, has not been overly impressive. Annual growth during the past 10 years has averaged 2.3 percent, compared to an average of 4.3 percent during the nine other post-World War II expansions, the publication Chief Investment Officer noted.

Even with the past decade becoming the Cal Ripken Jr. of economic expansions, the Federal Reserve in July cut interest rates for the first time since December 2008. The quarter-point reduction brought the target range for the federal funds rate down to 2 to 2.25 percent. Rate cuts are usually used to spur growth in a weak economy, but the Fed had been giving signs that it would not wait for a significant slowdown to reverse the process it began in December 2015 to slowly raise rates from the 0 to 0.25 percent range they were at after the recession.

The Fed’s brief post-meeting announcements are mostly boilerplate statements, and individual word changes are closely examined by economic and political analysts for meaning. So when, in June, after the Fed left rates unchanged, the announcement stated that “economic activity is rising at a moderate rate” – a phrase also used in the July announcement – it was widely noted that, in previous statements, the central bank had been describing the economy as growing at a “solid rate,” rather than a merely “moderate” one.

President Donald Trump has been pressing for a rate cut, saying before the July meeting that, “If we had a Fed that would lower interest rates, we would be like a rocket ship. We don’t have a Fed that knows what it’s doing.” The quarter-point reduction, though, did little to mollify Trump, who criticized Fed Chairman Jerome Powell in a tweet after the Fed’s meeting.

“As usual, Powell let us down,” Trump wrote. “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.”

Stock markets usually respond positively to rate cuts, but the markets declined after the quarter-point drop, possibly because analysts had anticipated a half-point reduction or because, as Trump said, no indication was given that additional cuts would be coming. Critics warn that reducing rates while the economy is strong will leave the Fed less able to respond during times of weakness. Two members of the Federal Reserve’s Federal Open Market Committee voted against the cut, while eight voted in favor of it.

Notably, Trump’s actions could be a big part of the reason why the Fed is concerned enough about the economy to be reducing interest rates. The central bank has indicated – in economist-speak – that Trump’s trade policies may be holding the economy back. In its midyear Monetary Policy Report, which was submitted to Congress in early July, the Fed stated that tariffs imposed by the Trump administration on China and other countries “appear to have lowered imports and exports in the United States and elsewhere, while uncertainty surrounding trade policy could be leading firms to delay investment decisions and reduce capital expenditures.” This followed Powell’s statement in June that, “The case for somewhat more accommodative policy has strengthened. It’s really trade developments and concerns about global growth that are on our minds. … Risks seem to have grown.”

One positive sign for the economy continues to be the labor market, with 164,000 jobs added in June and the unemployment rate remaining just above a 50-year low at 3.7 percent, according to the Bureau of Labor Statistics. Wages in July were 3.2 percent higher than a year earlier, decent growth for the post-Great Recession era but low enough not to raise inflation fears at the Fed.

Confidence in the manufacturing sector, though, appears to be waning, with the Institute for Supply Management’s Purchasing Managers Index falling for the fourth straight month. The index, now at 51.2, is at its lowest point in more than three years, and of 18 industries surveyed, only half reported growth. “Comments from the panel reflect continued expanding business strength, but at soft levels,” the chair of the institute’s Manufacturing Business Survey Committee said. Several survey respondents cited the impact of trade disputes, including one who stated, “General business trends are continuing to show signs of weakness resulting from tariffs and cost impacts of importing and exporting.”

Confidence among consumers bounced back in July, following a weak June, with The Conference Board’s Consumer Confidence Index increasing from 124.3 to 135.7. “After a sharp decline in June, driven by an escalation in trade and tariff tensions, consumer confidence rebounded in July to its highest level this year,” the board’s senior director of economic indicators said. “Consumers are once again optimistic about current and prospective business and labor market conditions. In addition, their expectations regarding their financial outlook also improved. … Although the index remains at a high level, continued uncertainty could result in further volatility in the index and, at some point, could even begin to diminish consumers’ confidence in the expansion.”

Housing starts were largely unchanged from May to June, increasing by less than 1 percent, though the June total was 6.2 percent higher than a year earlier, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales fell 1.7 percent from May to June, the National Association of Realtors reported, with the group’s chief economist attributing the decline, as he has before, to low inventory. “Imbalance persists for mid to lower-priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said. The median price for existing homes hit an all-time high in June of $285,700.

The Dow Jones Industrial Average ended July at 26,864.27, recording year-to-date gains of 15.2 percent. The S&P 500 Index closed out July at 2,980.38, up 18.9 percent since the start of 2019.

The dollar was trading at 0.90 euros, 0.82 pounds, 108.60 yen and 6.88 yuan as of July 31, having counterintuitively gained strength from the interest rate cut announcement.

The Federal Reserve knows that tariffs are bad for the economy. Other economists know it. Manufacturers know it. Consumers know it. And most politicians know it. Unfortunately, the one person in the United States whose opinion on the subject matters the most does not know it. The situation has become so bizarre that Trump, who continues to insist against all evidence that American consumers do not pay the cost of tariffs, bragged on Twitter in July about American farmers doing well because of billions of dollars in government assistance – what he called “China ‘replacement’ money” – that was necessitated by his protectionism. And, not for the first time, the people he was tweeting about found his claim to be less than accurate. The vice president of the American Soybean Association said, “To say we are doing great would be probably an overstatement. These markets are definitely still suppressed due to the tariffs.” Trump, though – again not for the first time – doubled down on a questionable policy approach and announced that he will impose tariffs of 10 percent on an additional $300 billion in Chinese goods in September, a move that was reportedly opposed by nearly all of his closest advisers. Former Fed Chair Janet Yellen famously said, “Expansions don’t die of old age.” If the current one succumbs to its injuries, there will be ample clues indicating that the culprit was President Trump in the Oval Office with tariffs.

Courtesy: AIIS