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We have never been in a 122-month-long expansion before, and we have never had an expansion when the peak fed funds rate was less than 2.50 percent.



August 2019 U.S. Economic Outlook

August 5, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

In Uncharted Territory, Where There is Nothing New Under the Sun

    We have never been in a 122-month-long expansion before, and we have never had an expansion when the peak fed funds rate was less than 2.50 percent. Also, we have never been this far into a trade war in this post-modern globally interconnected economy.
    Yet the U.S. economy is still cyclical and subject to its own momentum. Its course is determined by a combination of positive and negative feedback mechanisms, fiscal and monetary policy, and other external factors (war, weather, and recently, trade policy). It is a complex adaptive system full of non-linearities. It is both fickle and impassive.
    The strongest part of the U.S. economy right now is the consumer sector. It is also the biggest part of the economy, accounting for two-thirds of gross domestic product. Fortunately, jobs are plentiful, wages are going up (but not as quickly as expected). Households are saving money at a higher rate than before the Great Recession. In June, the personal saving rate inched up to 8.1 percent. The recent revisions to historical GDP data raised the estimated saving rate. Consumer debt also appears to be well managed. The household financial obligations ratio remains near the very low mark set after the Great Recession. A strong consumer sector allows the U.S. economy to absorb unexpected events without a significant loss of momentum. Yet the household sector is not monolithic. Older households are saving for retirement. Their consumption patterns will change in the years ahead. Younger households may be saddled with student debt that is preventing them from entering the housing market.
    Another near-term positive for the U.S. economy is the new 2-year federal budget deal that the President signed on Friday. The deal removes the threat of a federal government shutdown this fall. It also removes the threat of a large cutback in federal government spending in FY2020 that might have been required under the Budget Control Act of 2011. However, the budget deal came with no offsets. Federal spending will increase without offsetting budget cuts or increased taxes. This increases federal deficit projections by $1.7 trillion over the next decade. The two-year budget deal will expire after the 10-year horizon of the Budget Control Act of 2011 expires, so the threat of automatic sequestration on future budget negotiations is effectively over.
    Monetary policy looks like it will also be a near-term positive for the U.S. economy. In addition to the 25 basis point cut to the fed funds rate range announced on July 31, the Fed also announced that it ended its balance sheet reduction program early. Financial markets are strongly positioned for another fed funds rate cut this year. According to the fed funds futures market, there is a near 100 percent implied probability of at least one more 25 basis point rate cut by December 11. We have kept another 25 basis point fed funds rate cut for December in our interest rate forecast.
    Ideally, the Fed would wait and see how its recent rate cut is impacting the economy before it would initiate another policy move. That strategy would take a rate cut at the next FOMC meeting, over September 17/18, off the table. However, the trade war with China is escalating. The Trump Administration has threatened to apply a new 10 percent tariff on $300 billion dollars worth of Chinese imports that are not currently taxed. The new tariff will start on September 1 unless meaningful progress on a trade deal is made. Meanwhile, the Chinese yuan hit a new low against the dollar, and the Trump Administration is accusing China of currency manipulation. U.S. stocks are selling off in mid-August. Significant stock market losses could motivate the Fed to cut rates sooner rather than later.

For a PDF version of this publication, please click here: August 2019 U.S. Economic Outlook

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