The labor market, consumer spending, and other key gauges of U.S. economic activity continue to provide little evidence of an impending recession. The goods producing sector, though, is a clear weak spot due to its greater exposure to slowing growth overseas, FX fluctuations, and the ongoing trade war. On the national level this can be seen in the latest durable goods report released this morning by the U.S. Commerce Department, which showed that the annual rates of growth for both core orders and core capital expenditures have fallen to 3-year lows recently. Some softness in the year-ago comparisons was to be expected since business spending rose to an all-time high in 2018 following the stimulative effects of the Tax Cuts and Jobs Act.
However, any “giveback” has likely been exacerbated by the trade war that has now gone on much longer than many business leaders anticipated, and in turn caused firms to become more cautious about committing to substantial capital investments. Fortunately, America over the years has become a predominately services-focused economy and therefore remains well-positioned to weather the existing and proposed tariffs targeted primarily at goods. Of course a prolonged, retaliatory trade war could eventually spill over into other areas of the economy but for now the headwinds appear contained. In fact, recent communications from leaders in both China and the U.S. are encouraging and suggest a deal is possible in the near-future, or at the very least an avoidance of further escalations in tensions. It is also worth noting that the stockpiling efforts of some businesses in the face of tariff uncertainty could actually wind up having boosted GDP in Q3 and Q4. Although the eventual drawdown of this elevated inventory will act as a drag on growth, as long as the U.S. consumer remains in good shape any trade-related volatility appears manageable.
Sources: Econoday, U.S. DoC, Federal Reserve, FRBSL