Consumers now power more than 70 percent of economic activity with the slowdown in manufacturing. Consumers are keeping this economic recovery afloat. There is no question this is because rising incomes and plenty of available jobs have raised consumer confidence, which has now reached skyscraper levels.
“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,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers are once again optimistic about current and prospective business and labor market conditions. In addition, their expectations regarding their financial outlook also improved. These high levels of confidence should continue to support robust spending in the near-term despite slower growth in GDP.”
The consumer held up second-quarter GDP posting robust and inflation-adjusted annual spending growth of 4.3 percent, according to Econoday, “a mark that would be difficult to match let alone exceed in Q3 but that’s a possibility given the strong jump out of the gate for July retail sales.”
Manufacturing isn’t helping, as the trade wars have hurt exports that are the mainstay of manufactured products. The Federal Reserve report on industrial production showed a weakening in factory output for the fifth time this year, according to Bloomberg:
“It is the latest sign of fragility in the manufacturing sector as goods producers face the persistent headwinds of the U.S.-China trade war and tepid global demand. The latest escalation of U.S. trade tensions with China and renewed recession fears may further depress manufacturing output in the coming months.”
Consumers might continue to spend for the rest of this year if consumer sentiment holds up, as I said last week. The latest JOLTS report (Job Openings and Labor Turnover Survey) says there were 1.65 million more job openings (7.35 million) than the 5.7 million new hires in July.
It’s hard to see this recovery continuing into next year, however. Both consumers and corporations will rush to load up on goods and services during the holiday season with Trump’s postponement of the 10 percent additional tax (oops, I meant tariff) on $300 billion of China’s imports until December 15.
But after December? The rest of the world is hurting with the disruption of world trade from the trade wars and growing protectionism. Erecting barriers to trade is the one surefire way to bring on another recession, as we learned in 1930 with the enactment of the Smoot-Hawley tariff act. Germany’s export-led economy is already teetering on the edge of recession, as is Great Britain with its Brexit stalemate.
Another sign of hurt is the continuing plunge of the 10-year US Treasury bond yield to 1.57 percent this morning, while former Fed Chair Greenspan recently said there is no limit to how low it can go.
It is not a sign that investors are confident about future growth when lenders come begging to borrowers—are in fact willing to pay borrowers in the case of negative interest rates, rather than be paid.
Harlan Green © 2019
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