Aug 1, 2019 - Economy & Business

America's polarized economy and the Fed's rate cut

Finger controlling the direction of a line graph

Illustration: Lazaro Gamio/Axios

It's President Trump's move now that he got the rate cut he's been asking for since March, but Fed chair Jerome Powell stopped just short of giving him and the market everything they wanted at the Fed's policy meeting Wednesday.

Why it matters: Powell's cut is the central bank's latest effort to address the U.S. economy's current bipolar state: While consumers are confident and continue to spend, the significant pullback in the manufacturing and transportation sectors shows that businesses are not.

On one side: Tuesday's rock-solid U.S. consumer confidence reading was the latest sign that Americans feel good.

  • Commerce Department data Friday showed consumer spending, which makes up the lion's share of the U.S. economy, increased 4.3% in the second quarter, while government spending rose 5%, the biggest boost in a decade.

On the other side: Those numbers fly in the face of data on business investment that show firms dramatically slowing down spending and delaying big projects because of the uncertainty caused by the trade war.

  • Nonresidential investment fell 0.6% in Q2, the first drop since 2015, and residential investment decreased for a sixth straight period.
  • Readings on the U.S. manufacturing sector have fallen for 6 straight months — nearing an outright contraction — and the freight industry also has been slowing for the better part of the year.

The big picture: "Something has got to change," Mark Zandi, chief economist at Moody's Analytics, tells Axios. "Either consumers hold tough and cheer up businesses and they resume investing again, or businesses lose faith and cause consumers to pack it in, and we go into recession."

  • Which way the economy goes depends on Trump, Zandi says. While he continued to heckle the Fed on Twitter Wednesday after the rate-cut decision, it's Trump's tariffs and trade war with China that will determine whether the economy gets back on track or not.

Where it stands: As Powell mentioned during his press conference, the current cease-fire in the trade war has settled business owners somewhat, but further aggression will likely see more companies in the trade sector and other parts of the economy start to show negative effects.

  • "Confidence is all about the labor market right now and, somewhat paradoxically, because companies are not investing in capital goods, that might be creating more demand for labor," Tendayi Kapfidze, chief economist at LendingTree, told Axios. "Is it sustainable? I think the longer we go without a resolution to this trade issue, things start to get more vulnerable."
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