The Economy Takes New Ground - July 22, 2019

Fed official after Fed official has hinted at a rate cut at the end-of-July meeting. A rate cut is priced in. To forgo a decrease would likely create a jarring reaction in credit markets and among investors. The only question that remains – will we get a 0.25 percentage-point cut or a 0.50 percentage-point cut in the fed funds rate? Odds currently favor 0.25% per the CME Group.

But, is a cut in interest rates needed to keep economic growth on track?

While GDP growth will likely slow when Q2’s number is released on Friday, the internals may not be all that bad.

After a slow start to the year, consumer spending has accelerated, according to the latest government reports.

Retail sales have risen in five of the last six months, including a moderate 0.4% advance in June (U.S. Census).

Strip out autos and gas station sales (which help to filter out changes in gas prices), and sales rose an impressive 0.7%. Moreover, 3-month annualized sales have exceeded 8% in three of the last four months – see graphic below.

It may not be sustainable, but it’s not a sign that economic growth is faltering.

Overseas drama

While businesses and the Fed fret about trade tensions, the average consumer doesn’t appear to be paying much attention. He/she is more focused on short-term finances, job prospects, and job security. China is a world away.

Yet, changes in interest rates work with a lag, and the Fed tries to anticipate what may happen 6-12 months out. It’s still worried that weak growth overseas will slow growth at home.

It worries that growing trade frictions will impact business confidence, business spending, and eventually, hiring and consumer spending. Will that scenario play out? It’s a big unknown.

Hence, the Fed is actively considering a tweak in policy to support the economy. Meanwhile, most consumers go about their daily business.