Tags: recession | rate | cuts | economy | fed

US Isn't Close to Recession as 3 More Rate Cuts Loom

US Isn't Close to Recession as 3 More Rate Cuts Loom
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By    |   Monday, 19 August 2019 12:10 PM

Among all the noise of a growing possibility that the United States could slip into recession in 2020 or 2021, last week we got the advance estimates of U.S. retail and food services sales for July 2019 that showed unexpected strength as total sales rose 0.7 percent.

That jump, by the way, was its fastest increase in the last four months while excluding automobiles, gasoline, building materials and food services, retail sales rose 1 percent in July after rising 0.7 percent in June.

The so-called control group that is considered by economists, as well as traders as a more precise method of gauging U.S. consumer spending, rose 1 percent in July and rose 7.5 percent year-on-year during the second quarter, which was by the way one of the strongest quarterly performances since 2005.

For investors, it is important to keep in mind that consumer spending in the U.S. represents about 68 percent of the U.S. economy (2018).

For example, U.S. final household consumption expenditure is 5 times larger than that of Japan, which was in 2018 the world’s third largest economy in 2018 when measured by nominal GDP as measured by the IMF.

For investors, it’s important to keep in mind that these latest retail sales details certainly don't indicate an imminent recession threat for the United States. Meanwhile, there are also some early signs of inflation picking up, which could make the Federal Reserve’s job much more difficult in the months to come. At the same time, there are also undeniable signs that the industrial and manufacturing side of the U.S. economy aren’t performing that well.

The latest statistical data that was released by the Federal Reserve on Industrial Production and Capacity Utilization showed U.S. industrial production declined 0.2 percent in July after having fallen more than 1.5 percent since December 2018.

Capacity utilization for the industrial sector also decreased 0.3 percent in July to 2.3 percentage points, which is below its long-term (1972-2018) average.

The U.S. manufacturing output has now contracted in five of the last seven months, and it confirms that the U.S. economy has in fact has joined the global manufacturing slowdown, which is led by Chine and Germany. A key question for investors is: "Will the U.S. economy maintain sufficient internal strength through consumption’ to withstand the negative influences coming from abroad?"

The other key question for the U.S. economy and investors is and will continue to be: "What will finally come out of the lingering China-U.S. trade dispute?"

For his part, President Donald Trump said earlier this month that the United States is "not ready" to make a trade deal with China.

The U.S. Trade Representative’s office late last week released a complete list of the items that were removed from $300 billion in tariffs scheduled to go into effect on September 1 and December 15, some of which had already been hit with 25 percent tariffs after Trump had delayed more than half of the proposed tariffs until December, saying it would help shield businesses and consumers from the U.S.-China trade war fallout during the Christmas selling season.

The bulk of the items removed from the tariff list were furniture products, including wooden- and metal-framed chairs and those made of plastics. Some of these were previously hit with tariffs as part of broader furniture categories.

The U.S. Labor Department also said last week that the price index for household furnishings rose 0.4 percent in July, marking its third consecutive monthly increase and contributing to broad-based growth in consumer prices during July, Reuters reported.

All that said, and with what we have learned over the last couple of days, I still don’t believe that the U.S. is heading into recession.

I also now believe the Fed could cut the fed-funds rate by 0.25 basis points in September, December and March 2020.

I also don't believe that U.S. Treasury yields could go much lower than where they are now. On the contrary, I expect, for example, the 10-year Treasury yield to move back up to about 1.90 percent over the next 12 months or something like that. On Friday the 10-year U.S. treasury yielded 1.55 percent.

If that’s the case, investors that have a bearish view on the dollar could maybe temper their expectations for a weaker dollar over the near term.

U.S. GDP growth is also set to slow down, but not to collapse. A GDP growth rate of about 1.8 percent in 2020 is fully in the cards, which is of course somewhat below trend.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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I still don’t believe that the U.S. is heading into recession. I also now believe the Fed could cut the fed funds rate by 0.25 basis points in September, December and March 2020.
recession, rate, cuts, economy, fed
Monday, 19 August 2019 12:10 PM
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