U.S. Economic Outlook, October 2019

Robert A. Dye, Ph.D.

,

Daniel Sanabria

Calculator with pen and economic chart

We are seeing increasing evidence of a systemic cooldown in the global economy.



Global Cooling, Interesting Times at the Fed

We are seeing increasing evidence of a systemic cooldown in the global economy. This summer the World Bank revised their global real GDP forecast down to 2.6 percent for 2019, meaningfully below the 3.1 percent real global GDP growth posted for 2017. Commodity markets are sagging as they expect weaker demand. Industrial metals prices are slumping. Oil prices are down just days after a major supply disruption in Saudi Arabia. Manufacturing indicators are weak. Several key countries are near recession. In Europe, Germany, Italy and the U.K are vulnerable. The U.K.’s already slowing economy still needs to absorb Brexit later this month unless a last minute extension is sought. In Asia, Russia, South Korea and Singapore are limping. In Latin America, Argentina, Brazil and Mexico are on the verge of recession. 

In response to weaker conditions, central banks are easing monetary policy. The Reserve Bank of India is the most recent major central bank to cut interest rates. With interest rates already low worldwide, monetary policy has less leverage to lift sagging economies. That is why incoming European Central Bank President Christine Lagarde has called on European countries to implement fiscal stimulus. The Netherlands recently announced a 2020 budget plan that includes a tax cut and increased government spending. All eyes are on Germany to see whether they will put together a meaningful fiscal push.

The U.S. is vulnerable to the global pattern. The September ISM Manufacturing Index fell to 47.8, indicating slight contraction in the U.S. manufacturing sector. The index first slipped below the 50 break-even mark in August. It has been trending down since mid-2018. In addition to a cooling global economy, a slew of other factors is weighing on U.S. manufacturing. (1) Unpredictable trade policy is disrupting U.S. exports. (2) The strong dollar is a headwind for exports. (3) The auto sales cycle appears to be slowly winding down. (4) The UAW/GM strike is entering its fourth week. (5) Boeing has had significant issues with its 737-MAX. (6) The oil industry is consolidating and reducing capital expenditures. (7) Residential construction remains range-bound. Manufacturing accounted for about 12 percent of U.S. economic output in 2018. Manufactured goods account for about half of U.S. exports. 

The U.S. economy can continue to expand overall, even as the manufacturing sector cools. The ISM Non-Manufacturing Index, capturing the bulk of the U.S. economy, is also trending down, and fell again in September. But the index level of 52.6 in September still shows a modest expansion. If both key indexes were to fall below 50, that would be a strong recession indicator.

A key buffer against a recession in the U.S. is the strong household sector, as we have discussed in the previous two editions of our U.S. Economic Outlook. Recent data shows that household fundamentals are still good, but there are vulnerabilities. Real consumer spending in August was weaker than expected after a strong July. Even though real disposable income increased by 0.4 percent in August, real consumer spending gained just 0.1 percent. Households held onto their cash as consumer confidence dipped. An increased personal saving rate is a wonderful thing for building household wealth, but retailers felt the pinch. The Personal Consumption Expenditure (PCE) Price Index for August showed year-over-year inflation of just 1.4 percent, still well below the Fed’s symmetric near-2-percent target. 

Strong labor market conditions are a key support to consumer spending. Labor markets tightened in September as the unemployment rate fell to a 50-year low, hitting 3.5 percent. Payroll job growth was moderate at 136,000 for the month, but it is stepping down from a solid run through 2017 and 2018. According to Challenger, Gray and Christmas, job cut announcements fell in September after climbing in August. The September total of 41,557 announced job cuts was still up 28 percent over the previous 12 months. Hewlett Packard and WeWork just announced major job cuts. 

The Federal Reserve will convene to set policy over October 29/30. The odds of another rate cut coming at the end of the month have increased significantly over the last week. We have kept our no-October-rate-cut view in this forecast. However, over the days ahead there will be plenty of opportunity for Jay Powell & Company to reset expectations for an end-of-October fed funds rate cut.



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

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October 7, 2019
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist