Economic Outlook – 1 September 2019


  • The second estimate of Q2 2019 GDP showed the economy grew at a 2.0% annualised pace, which was only a tenth lower than the initial estimate, most likely the consumer carried the weight in the second quarter. But revised data show personal consumption expenditures rose an even stronger 4.7% (4.3% previously), adding 3.1 percentage points to headline growth. This is the fastest quarterly pace in nearly five years, and significantly above of the 2.5% average quarterly figure seen this expansion.
  • Monthly consumption data suggest spending is off to a solid start in the third quarter. Retailers saw strong sales in July, consistent with this morning’s personal consumption data, which showed a 0.6% increase in spending last month. Johnson Redbook sales data, which track same-store sales, also suggest sales remained strong in August. Not only is the spending data coming in strong, measures of consumers’ confidence remained surprisingly elevated this month, despite financial market instability and constant headlines about the trade war. Consumer fundamental suggest spending should remain solid in H2 2019, though a pace north of 4.0% is unlikely to be sustained.
  • Equipment spending managed to eke out a modest 0.7% gain, but prospects for Q3 spending are quickly falling. Nondefense capital goods shipments, which feed into equipment spending, retreated 3.0% in July, after being revised lower to only a 0.9% gain in June
  • The manufacturing sector, however, is weakening under trade uncertainty. Industrial production declined in July, and manufacturing production is in a trend decline thus far in 2019. Further, the PMI data for August were mixed, with two regions reporting a decline in activity and the Markit Manufacturing PMI slipping into negative territory for the first time since September 2009. Meanwhile, capital spending plans at manufacturers continue to edge lower as global growth slows further and trade uncertainty lingers.
  • In an op-ed carried last week by Bloomberg, former president of the Federal Reserve Bank of New York William Dudley created an uproar by suggesting that his former colleagues craft policy in such a way as to weaken US President Donald Trump’s reelection chances by not easing monetary policy to attempt to offset the impacts of the ongoing trade war with China. The Federal Reserve Board immediately issued a statement rejecting the recommendation, saying “The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Politics should play no role.”
  • As Americans rushed off to start the weekend last Friday, President Trump announced that the US was ratcheting up existing and planned tariffs on China by 5.0 %. The measures, which would affect some $550 billion in goods, were a response to China’s announcement that it would raise tariffs on $75billion worth of US goods. However, tensions eased this week on indications that China wants to get back to the negotiating table, and would refrain from immediate retaliation to the latest US action.
  • Stocks enjoyed their best week in nearly three months, as investors appeared to grow more confident in the prospects for a US – China trade deal. Trading volumes were low early in the week but picked up somewhat as institutional investors sought to rebalance portfolios before the end of the month. Within the S&P 500 Index, industrials outperformed, helped by a rise in UPS shares. Health care, consumer staples, real estate, and utilities shares lagged. Johnson & Johnson (J&J) shares surged last Tuesday after a judge ruled that the company bore some responsibility for Oklahoma’s opioid epidemic but awarded smaller damages to the state than many expected. J&J shares surrendered most of their gains over the following few days, however.
  • Reflecting the mixed economic signals, the yield on the benchmark 10-year Treasury note ended the week roughly unchanged. The 10-year yield again spent part of the week below the two-year yield, however, marking a yield curve inversion that has reliably preceded an impending recession (if also delivering occasional false positives). More notably, perhaps, the 30-year yield continued falling to record lows and slipped below the yield on the three-month note. Long-term US yields remain well above those of most other developed markets, however. Last Wednesday, Treasury Secretary Steven Mnuchin told Bloomberg that the government was seriously considering offering ultralong bonds (Treasuries with maturities of 50 or even 100 years).
  • ISM manufacturing for August is due for release on Tuesday, the weighted regional PMIs suggest that ISM manufacturing is set to come in stronger, but Markit PMI has shown weakness the past couple of months.
  • The jobs report for August is out on Friday , the labour market has also shown weakness for a while so  it is important to keep an eye on employment growth, which is an important recession indicator. Employment growth is expected to come in around 164,000.


  • The August flash annual consumer price index was 1.0% year-on-year and in line with expectations, compared to 1.1% the previous month. Meanwhile, core inflation was slightly lower than expectations at 0.9% and unchanged from the month before. As such, the broad trajectory of sluggish inflation continues as medium-term inflation remains stuck below 1.0%, increasing pressure on the ECB to act. The eurozone composite release is broadly reflected across the three largest euro economies. Yesterday’s release of German inflation showed an unexpected weakening in August, with consumer prices growing 1.0% from a year earlier compared to 1.1% the previous month. With an ongoing manufacturing-led downturn, pressure is growing on the government to deliver more fiscal stimulus to head off a recession.
  • Most major European markets rose throughout the week, buoyed by improvements in US – China trade talks and the agreement of Italian political parties to form a new government. The pan-European STOXX Europe 600 Index rose more than 2.0%, while the exporter-heavy German DAX advanced 2.5%, and Italy’s FTSE MIB Index gained almost 4.0%.
  • German data provided more evidence that trade disputes are pushing the German economy toward recession. Germany’s Ifo Institute’s business climate index fell to its lowest level since August 2012. Ifo Economist Klaus Wohlrabe told Reuters that he expects stagnation, at best, for the third quarter. While the auto industry has improved, the engineering, chemicals, and electric sectors have deteriorated. The group’s business sentiment survey showed business morale deteriorated more than expected in August to hit its lowest level in nearly seven years. Separately, Germany’s Federal Statistics Office reported that the German economy contracted 0.1% on a seasonally adjusted basis in the three months to June 2019. Exports fell faster than imports, and investment in construction declined markedly.
  • Italy’s anti-establishment Five Star Movement reached agreement with the center-left Democratic Party to form a governing coalition, avoiding a return to the polls for the second time in less than two years. The combination has thwarted, at least temporarily, the League’s Matteo Salvini, who brought down the Five Star-League coalition in hopes that new elections would propel him to the premiership. Markets welcomed the new coalition by driving the yield spread between German and Italian debt to its lowest level since last year’s election, on hopes of a smooth budget negotiation between Italy and the EU. Giuseppe Conte will return as prime minister.
  • In the euro area, focus will be on the final Q2 GDP estimate, which is due out on Friday, as detailed information about the GDP components will become for the first time. The flash estimates showed that the euro area economy is limping along with a growth rate of 0.2% quarter-on-quarter.


  • Announcing a new legislative agenda, British Prime Minister Boris Johnson has arranged to suspend Parliament for a crucial five-week period leading up to the 31 October Brexit date. Lawmakers will have very little time to take action to block a no-deal Brexit or to pass a motion of no confidence in Johnson. The prime minister hopes to wring concessions on the Irish backstop from the European Union if it is confronted with a no-deal outcome. Members of Parliament return from their summer recess on Monday and have a week to try and shape the course of Brexit or pass a motion of no confidence in the government.
  • The British pound came under pressure against the US dollar, but the FTSE 100 Index rose after Prime Minister Boris Johnson suspended Parliament from mid-September until 14 October to push through Brexit. The move, which was approved by Queen Elizabeth II, reduces the time opponents of Brexit will have to prevent a disorderly Brexit but also increases the chance that Johnson could face a vote of no-confidence in his government, triggering a possible election.
  • British lenders approved the greatest number of mortgages in two years during July, adding to signs the housing market has stabilized from its pre-Brexit slowdown, official data showed on Friday. The Bank of England said lenders approved 67,306 mortgages, up from 66,506 in June and more than any economist predicted in a Reuters poll that had pointed to 66,167 approvals for July.
  • In terms of data release, the PMIs for August are due out falls are expected in both the service and manufacturing indicators.


  • Investors in Chinese stocks appeared less encouraged by the latest trade developments and braced for the next wave of US tariffs. For the week, the benchmark Shanghai Composite Index declined 0.4% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, shed 0.6%. Both indices fell in August, with the Shanghai composite falling 1.6% and the CSI 300 giving up 0.9%, according to Reuters.
  • The data for August is released this week. On the manufacturing side, the trade war uncertainty and general weak global trade momentum are expected to weigh on the Chinese manufacturing. As a result, both the Caixin and China’s official PMI manufacturing are likely to see further setbacks with the Caixin falling to 48.9 from 49.9 in July. The manufacturing PMIs is expected to fall further in the coming months given the low prospects for a trade deal. With the current tensions between the US and China on the trade front, news about possible upcoming negotiations between the two sides could be an important driver for global risk sentiment.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Handelsbanken Capital Market, TD Economics, Danske Bank, BMO Economics, Wells Fargo.