There is no doubt that the US economy is slowing. GDP growth is less than it has been for the last two years, which has prompted many to suggest that the Federal Reserve should lower rates. It appears as if they will in the next two meetings.
Still, despite softness in the economy, there are signs that we may not be headed into a recession. A recent report on manufacturing suggests that the economy continues to grow. While this may cause some concern that interest rates may not be cut, it does provide some evidence that a deeper economic slowdown is not inevitable.
CNBC outlined this issue in a recent article titled “A booming manufacturing report just poked another hole in the Fed’s case for a rate cut”. In that article they stated:
Philadelphia area manufacturing rebounded sharply in July, just as the Federal Reserve is expected to cut interest rates to boost economic activity.
The Philadelphia Fed saw its primary gauge measuring the sector jump from 0.3 in June to 21.8, far better than Wall Street estimates of 5 and the highest in a year. The index measures the difference between companies saying they are expanding activity against those expecting to reduce.
Nearly every indicator within the index rose sharply: Employment doubled to 30, its highest reading since October 2017, while the average work week more than tripled to 23, its best in 14 months. Shipments jumped to 24.9 from 16.6 in June while new orders surged to 18.9 from 8.3. Prices paid, a key measure of inflationary pressures, also rose to 16.1 from 12.9.
Only unfilled orders and delivery times fell, the latter fractionally from 15.6 to 15.
Source: July 18, 2019; CNBC.com article by Jeff Cox
It's always a balance between the desire for interest rate cuts and fears of slowing economic growth. If the Federal Reserve was required to make dramatic cuts it would suggest that economic conditions significantly deteriorated. On the other hand, softness and economic growth can create an opportunity to cut rates, which is deemed to be positive for bond and equity markets. It's a fine line for sure.
We carefully watch data, reports, and Federal Reserve activity as we make investment judgments. It is our view the Federal Reserve will cut interest rates this year. Additionally, we believe the likelihood of a recession this year has decreased. Next year, the odds are greater that there will be a slowdown.
We are investing on the assumption rates will be flat to down and have been of this belief for some time. We were never convinced that interest rates would dramatically spike this year as some believed. We will keep investing based on our outlook unless conditions and data suggest a different course of action.
If you have any questions about this information, please let us know. Always here to help!