FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• A quiet, holiday-shortened week featured data that painted a picture of an economy that has slowed, but not stalled. Revisions to Q2 GDP did little to change the picture of the economy.
• Durable goods orders were a bright spot, but the Fed’s manufacturing surveys continue to point to a lack of confidence on investment spending. The Beige Book echoed this two-speed view of struggles in the factory sector, and health elsewhere.
• The consumer remains an area of strength, with spending on track to put in a solid performance in Q4, helped by healthy advances in wages and salaries and benign inflation.

Something To Be Thankful For

A relatively quiet, holiday-shortened week featured data that painted a picture of an economy that has slowed, but not stalled. Revisions to Q3 economic growth were uneventful. Headline GDP growth was revised up from 1.9% annualized to 2.1%, largely owing to a build-up in inventories. Rising inventories are not typically a sign of economic strength, so we don’t view that slight upward boost as changing the picture in a meaningful way.

Final domestic demand was 2% in Q3, after averaging 2.7% in the first half of the year, and 3% in 2018. That is the narrative right there. The economy has slowed from a robust pace to a moderate pace, very close to what we consider its underlying “trend”(Chart 1). The Fed’s latest Beige Book indicated that this tempo has likely continued this quarter. It characterized economic activity as progressing at a modest pace through most districts, unchanged relative to the prior report. Consumer related sectors, including residential construction, are doing well, while ongoing struggles in the manufacturing sector continued.

Durable goods orders for October painted a slightly better picture. Nondefense capital goods orders ex-aircraft, a key signpost to business investment, had a solid gain for the first time in a few months. It wasn’t enough to change our view of manufacturing weakness, but it did support an upgrade to expectations for equipment spending in Q4. Overall, we expect business investment to advance roughly 2.4%, ending two quarters of contraction. However, this does not entirely lift the damper uncertainty is having on investment (see report). Looking at the regional Fed manufacturing surveys, the capital expenditures components on the whole weakened further in November, so we don’t believe business spending or the manufacturing sector is out of the woods yet.

On the plus side, the October personal spending data suggests that the consumer is looking solid at the start of the fourth quarter. Barring a confidence-sapping event, we expect consumer spending to come in around 2.4%, in line with our September forecast. The gray cloud in the October data was a drop in real personal disposable income. However, that seems to have been due to a decline in farm incomes, after a sizeable boost from government payouts to compensate farmers for tariff-related damages. Wages and salaries still rose 0.4% on the month, and was up 4.9% versus a year ago (nominal terms) – a pretty healthy pace, particularly when overlaid on the benign inflation backdrop.

The Fed’s preferred inflation measure – the core PCE deflator – rose only 0.1% in October (Chart 2). The Dallas Fed’s trimmed mean (which strips out price volatility more broadly than food and energy) has been steady at the Fed’s 2% target for a few months. There’s little on the inflation front to spook the Fed to either cut or raise interest rates any time soon. Early in the week, Chair Powell highlighted the benefits of extending the current economic cycle – mainly that lower income households have not yet regained the wealth lost in the great recession. Strong labor markets are finally starting to spark healthy wage gains for lower-income workers, which spreads the gains from a strong economy more broadly. Amid all the trade gloom and uncertainty, that is something to be thankful for.

Leslie Preston, Senior Economist | 416-983-7053

Financial News- November 29, 2019 

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