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Weekly Economic and Financial Commentary: One More Ball to Juggle

U.S. Review

Politics Takes Center Stage

  • The release of the transcript of President Trump’s phone conversation with Ukraine President Volodymyr Zelenskiy and the whistleblower complaint overshadowed most of this week’s economic reports and took bond yields modestly lower.
  • Consumer confidence came in weaker than expected in September, falling 9.1 points to 125.1. The jobs plentiful series fell back from its cycle high hit the previous month.
  • Durable goods orders rose 0.2% in August, but nondefense capital goods orders fell by a like amount and were revised lower for the prior month, indicating that capital spending continues to lose momentum.

One More Ball to Juggle

The onslaught of news reports concerning President Trump’s midsummer phone call with Ukrainian President Volodymyr Zelenskiy overshadowed most of this week’s economic reports. The impeachment inquiry is almost certain to dominate the headlines, but Trump’s strong support within the Republican Party means he is unlikely to be removed from office. His 91% approval rating among Republicans, according to Gallup, is a key variable to watch—if it slips, market volatility is likely to increase. The impeachment investigation and related hearings might make it even more difficult to reach a meaningful trade deal with China. The market had placed fairly low odds on such a deal being reached, however. Legislation should still move forward on many fronts, including the USMCA, or update of NAFTA (see Topic of the Week).

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This week’s economic reports reinforce the notion that U.S. economic growth is continuing to lose momentum. While slower growth overseas is responsible for much of the drag on U.S. growth, consumers and businesses appear to have become more guarded about the outlook. Consumer Confidence fell by a larger than expected 9.1 points to a still respectable 125.1. Consumers grew more cautious about both the present situation and future conditions. The robust assessment of the labor market a month earlier was also completely reversed.

Too much should not be made of the big drop in Consumer confidence. The Conference Board’s survey was out of sync with the University of Michigan’s Consumer Sentiment Survey, which was reported Friday morning. Consumer sentiment rose 1.2 points to a solid 93.2. Measures of consumer confidence tend to track spending and employment conditions over time but do a poor job of predicting month-to-month changes.

Consumer spending for August came in slightly below expectations, rising just 0.1%, while spending growth for the prior month was revised 0.1 percentage point lower to just a 0.3% gain on an inflation-adjusted basis. The smaller rise in consumer spending brings outlays a touch below our expectations but well below the consensus which had been looking for a stronger gain. Consumers appear to be in solid shape, however. Nominal personal income rose 0.4% in August, led by wages & salaries, which rose 0.6%. With income outpacing spending, the saving rate rose back above 8%. Consumers certainly have the wherewithal to keep spending on a solid path.

Advance orders for durable goods rose 0.2% in August, but the key nondefense capital goods ex-aircraft orders fell 0.2% and saw orders for the prior month revised from a 0.2% gain to unchanged. Shipments rose modestly. The orders numbers are clouded by the slowdown in Boeing’s 737 Max production as well as the GM strike, which is beginning to have some impact on parts inventories. We incorporated the weakness in capital spending in our latest forecast and both the softer consumer spending and core durable goods shipments data remain consistent with our estimate of 1.6% third quarter real GDP growth.