Aug 1, 2019

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

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."

Go deeper

Jay Powell's constraints

Illustration: Sarah Grillo/Axios

Jay Powell did his best impression this week of a Fed chair making his own data-driven decisions about where he should set short-term interest rates. The reality, however, is that the markets and the president are giving him very little choice.

Driving the news: Powell cut interest rates on Wednesday — the first time the Fed has done so in over a decade. In doing so, he effectively fulfilled a prophecy that the fixed-income markets (and even the stock market) had been making for all of 2019. They saw the rate cut coming long before the Fed was willing to admit it, and they were right all along.

Go deeperArrowAug 4, 2019

Trump calls on Fed to cut rates by "at least 100 basis points"

President Trump on Monday tweeted that the Federal Reserve should cut interest rates by "at least 100 basis points, with perhaps some quantitative easing as well," in order to boost the U.S. and world economy.

"Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to 'will' the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world. The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!"
Go deeperArrowAug 19, 2019

The U.S. services sector starts to sink

Data: Institute for Supply Management; Chart: Axios Visuals

The U.S. services sector slowed for a second straight month in July, showing the continued decline in American economic activity.

Why it matters: It was the lowest reading for the sector, which makes up around 70% of the U.S. economy, since August 2016.

Go deeperArrowAug 6, 2019