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Sequential Slowing of GDP Growth Convinces Fed to Lower Interest Rates
August 05, 2019 The US economy grew 2.1% larger last quarter than the same time last year, according to official data released last Friday, but the growth was slower than the first quarter, as expected. US firms imported less in the first quarter, which improved the country’s “trade balance” and in turn gave the economy a boost. There was also lower demand from foreign buyers in the first quarter, which meant unsold products built up – but this reversed in the 2nd quarter. Business spending also fell for the second quarter in a row, but that was partly offset by rising government spending – which climbed the most since 2009. In the first quarter, a strong overall economy distracted from lackluster consumer spending. But n Q2, it exceeded forecasts. American consumers still aren’t digging deep for big-ticket items like cars, but they’ve been going to town on coffees and burgers, which could be why Starbucks –McDonald’s experienced major growth in the U.S. Despite the stronger-than-expected economic growth, US Federal Reserve lowered the country’s interest rates, to 2% from 2¼% a pre-emptive measure to sustain America’s longest-ever economic expansion. The European Central Bank has had the opposite problem. It’s primed to lower eurozone interest rates in response to weak economic growth suggesting the region’s countries will soon need to offer additional support to their respective economies. Figure 1: U.S. Federal Funds Rate vs, ECB Rate |
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Source: U.S. FED, ECB
Is the GDP growth of 2.1% a positive or negative indicator of the economy” It depends on who’s in power, With Obama as president, attacks came from the right and with Trump they come from the left. The latest debate is over real (inflation-adjusted) GDP, some say it showed soft spots from the trade war and weak business investment. Net exports (exports minus imports) trimmed the Q2 real GDP growth rate by 0.65 percentage points. But that follows the Q1 boost to growth of 0.73 points. In the past year, trade has subtracted an average of 0.58 points each quarter. There were larger drags from net exports in 2010, 2014, and 2015, all years without "trade wars." One conclusion net export difference is statistical noise. Real business fixed investment, declined at a 0.6% annual rate in Q2, the first drop since 2016. But the Q2 decline was almost entirely due to a drop-in brick and mortar investment (what economists call "structures"). In the age of the Internet, software and computers are replacing brick and mortar. As a result, investment in structures has slowed in recent years while investments in technology and equipment have continued to rise. Strip out structures, and real fixed investment rose at a 1.9% annual rate in Q2 2019. More importantly, business investment ex-structures have clearly picked up under the Trump Administration compared to Obama's second term.
Real business investment, excluding structures, grew at a 3.8% annualized rate between Q4 2012 and Q4 2016, but accelerated to a 5.9% annualized rate since Trump took office. Real Investment in software and R&D grew at a 5.5% annualized rate in the final four years of the Obama Administration versus 7.5% since the start of 2017. Tax cuts and deregulation have indeed boosted "animal spirits." Core GDP – combining personal consumption, business investment, and home building – grew at a very solid 3.2% annual rate in Q2. Meanwhile, profit reports are widely beating expectations. The economy is much stronger than conventional wisdom thinks and has been since 2009. From: Finimize
Real business investment, excluding structures, grew at a 3.8% annualized rate between Q4 2012 and Q4 2016, but accelerated to a 5.9% annualized rate since Trump took office. Real Investment in software and R&D grew at a 5.5% annualized rate in the final four years of the Obama Administration versus 7.5% since the start of 2017. Tax cuts and deregulation have indeed boosted "animal spirits." Core GDP – combining personal consumption, business investment, and home building – grew at a very solid 3.2% annual rate in Q2. Meanwhile, profit reports are widely beating expectations. The economy is much stronger than conventional wisdom thinks and has been since 2009. From: Finimize
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