The U.S. economy slowed over the past year. Real GDP growth peaked in the second quarter of 2018 at an annual rate of 3.2% and has moved downward to a second quarter 2019 level of 2.3%. For third quarter 2019, GDP is expected to continue decelerating to an annual growth rate of 2.0%.
Momentum in U.S. job growth has also weakened over the same period, from a twelve-month average of 206,000 in the second quarter of 2018 to an average level of 179,000 for third quarter 2019. This represents a 13% decline in payroll growth.
The decline in economic activity is far reaching and global. According to Moody’s Analytics, a majority of the world is struggling to grow, and two major countries are in recession -- Italy and Turkey. Multiple factors are behind the synchronized slowdown, but trade policy and Brexit are key headwinds.
A reduction in world trade -- mainly driven by trade tariffs restraining economic activity in China – has shaken business confidence.
The U.K.’s unclear path of departing from the European Union (EU) has taken a toll on Europe’s financial markets and economy. A majority of Europe’s trade is intra-regional and the ongoing uncertainty has impeded growth and reduced companies’ appetite for investment. The U.K. was slated to leave the EU on October 31 with a “No Deal Brexit” but PM Johnson has called for a Brexit extension of up to three months and a general election to be held on December 12.
Central Banks are intervening to help steady global growth
To help stabilize economies, the Federal Reserve and other global central banks stepped in with monetary policy stimulus by aggressively cutting interest rates. They have signaled that more rate cuts are likely to come. The Fed has lowered rates twice since the summer, by 0.25 percentage point each time, and at least one more 0.25-point rate cut appears imminent. A fourth cut in December remains a possibility if economic activity continues to deteriorate.
The Fed’s success in thwarting weakness in the economy will depend in large part on whether President Trump continues to pursue his trade war. There is optimism that U.S.-China trade negotiations will reach a phase one deal that addresses specific trade issues. President Trump has agreed to cancel the October 15 increase in tariffs with a phase one agreement. China is requesting the White House cancel plans to implement tariffs on $156 billion worth of Chinese goods, including cellphones, laptop computers and toys on December 15 in exchange for more agricultural purchases. China is willing to buy $20 billion of agricultural goods next year, which would take China’s agricultural purchases back to the pre-trade war level in 2017.
The American consumer is managing through weaker global growth in excellent shape
The resilience of the U.S. consumer leads to optimism that the global economy will weather through difficult times without falling into contraction. U.S. households have been a pillar of strength as overseas economies have struggled. Consumer confidence measured by the University of Michigan survey increased in both September and October and is holding near this year’s average level of 95.6. The focus of consumers has been on income and job growth, while largely ignoring other news such as tariffs, the impeachment inquiry and the GM strike.
Consumers have good reasons to feel confident. Unemployment is at a 50-year low of 3.5%, and it is low across nearly all industries, occupations and regions of the country. The surge in underemployment during the 2008-09 recession, where U6 unemployment reached above 17%, has come full circle. This category -- which includes discouraged workers who quit looking for jobs and part-time workers wanting full-time employment -- has declined to 6.9% and is closing-in on a new 20-year low. Furthermore, the employment-to-population ratio for prime-age workers (25-54 years) has climbed back near its pre-recession high.
Household finances are upbeat with the personal saving rate at 8.1%, reaching levels consistently seen back in the late 1980s/early 1990s. Consumers are borrowing at a healthy pace with credit balances steadily rising over the past five years and, in aggregate, are now $1.2 trillion above the previous peak in the third quarter of 2008 of $12.98 trillion.
The consumer’s debt service burden is manageable as households have locked into low interest rates after multiple rounds of mortgage refinancing. The household debt service ratio – or the amount of income that households use to make timely mortgage and consumer debt payments – is at a record low of 9.6%. The delinquency rate on all household debt outstanding is at 4.4%, near all-time lows.
Risk of recession is expected to remain well-contained
If the Fed and other global central banks remain accommodative, and Brexit takes a reasonably orderly path, the U.S. and global economy should avoid a sharper downturn in economic activity, at least through the end of the decade.
It would be uncommon to suffer a recession due to geopolitical issues such as a trade war or Brexit. Policymakers typically figure-out ways to revise well-intentioned policies that are harming the economy as they recognize the political ramifications of an economic downturn on their chances of remaining in power. This logic is expected to prevail in the current circumstances, where President Trump finds a way to call a truce in his trade war and the British avoid a no-deal Brexit.
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