AIIS July 2019 Market Update

SEATTLE (Scrap Monster): The U.S. economy in June set a record for the longest expansion in the nation’s history – 10 years and one month, a streak that began in June 2009 following the Great Recession.

Growth, while sustained, has not been overly impressive, however. In fact, the cumulative expansion of 25 percent is well below other post-World War II growth spurts. Annual growth during the past 10 years has been 2.3 percent, compared to an average of 4.3 percent during the nine other postwar expansions, the publication Chief Investment Officer noted.

In the first quarter, the economy achieved a 3.1 percent annualized growth rate, according to the Bureau of Economic Analysis. In 2018, quarterly growth was 2.2 percent, 4.2 percent. 3.4 percent and 2.2 percent.

Even with the strong growth, President Trump continues to press the Federal Reserve to lower interest rates to provide an additional economic boost.

“If we had a Fed that would lower interest rates, we would be like a rocket ship,” Trump said in early July before lamenting, “We don’t have a Fed that knows what it’s doing.”

The Federal Reserve, however, has indicated – in economist-speak – that it may be Trump’s trade policies, not interest rates, that are keeping the economy from reaching orbit. 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.”

Notably, Trump’s protectionism could get him the lower rates that he wants, with the Fed appearing to have shifted from planning to continue to gradually raise rates through 2019 to possibly cutting them, in part because of the economic threat posed by tariffs.

“The case for somewhat more accommodative policy has strengthened,” Federal Reserve Chairman Jerome Powell said in June. “It’s really trade developments and concerns about global growth that are on our minds. … Risks seem to have grown.”

At its June meeting, the Federal Open Market Committee kept the target range for the federal funds rate unchanged at 2.25 to 2.5 percent, while noting that “economic activity is rising at a moderate rate.” 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. The notable change in the June statement as compared to preceding ones is that the Fed had been describing the economy as growing at a “solid rate,” rather than a merely “moderate rate.”

The Fed last raised rates in December 2018.

One strong positive sign for the economy is that it added 224,000 jobs in June, according to the Bureau of Labor Statistics. The unemployment rate inched up a tenth of a point from a nearly 50-year low to 3.7 percent. Weak job growth in May – only 75,000 jobs were created during the month – had raised some concerns about the nation’s economic prospects. Wages increased 3.1 percent from June 2018, solid growth for the post-Great Recession era but probably low enough not to raise inflation fears that could cause the Fed to rule out an interest rate cut.

Confidence in the manufacturing sector, though, appears to be waning, with the Institute for Supply Management’s Purchasing Managers Index falling for the third straight month. The index, now at 51.7, is at its lowest point since late 2016. Of 18 industries surveyed, 12 reported growth. “Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy,” the chair of the institute’s Manufacturing Business Survey Committee said. “Overall, sentiment this month is evenly mixed.” Among the survey respondents who cited the impact of trade disputes, one representative of the fabricated metal products sector said, “Tariffs continue to adversely impact decisions and forecasting. Our increasing fear is that current trends will weaken the global economy, influencing our ability to grow in 2020 and beyond.”

Confidence has also slipped among consumers, with The Conference Board’s Consumer Confidence Index dropping from 131.3 in May to 121.5 in June, its lowest level since September 2017. And consumers appear to have some of the same concerns as manufacturers. “The escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence,” the board’s senior director of economic indicators said. “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 June at 26,599.96, recording year-to-date gains of 14 percent. The S&P 500 Index closed out the first half of the year at 2,941.76, up 17.4 percent since the start of 2019.

The dollar closed June trading at 0.88 euros, 0.79 pounds, 107.93 yen and 6.87 yuan.

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 in July bragged on Twitter about American farmers doing well because of billions of dollars in government assistance – what he called “China ‘replacement’ money” – that was necessitated by his tariffs. 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.” And that is just one part of one sector of the economy. Overall, the economy, to this point, is surviving the tariffs. But, contrary to what one resident of 1600 Pennsylvania Avenue thinks, it is certainly not prospering because of them.

Courtesy: AIIS