|

Is the US economy peaking out? Too many indicators are going in the wrong direction

  • After an excellent second quarter, data for the third quarter begin to disappoint.
  • The circus around Trump diverts attention from the data.
  • The Fed may begin noticing it soon and this may hurt the US Dollar.

The US economy grew at an annual pace of 4.1% in Q2 2018 according to the initial read. President Donald Trump took a victory lap on the fastest growth rate in four years. Some had noted that the accelerated pace in Q2 might be related to a front-running of the tariffs on China. 

Once the rush is gone, we may see some moderation. And with these duties serving as a tax on consumers. There is nothing wrong in a sub 4% quarter. But this may be somewhat worse than that. 

Tariff-related or not, the data released in mid-August are not so promising:

  • Existing Home Sales dropped for the fourth consecutive month. The last time this was seen was 2013.
  • New Home Sales slipped and with a downward revision. Housing is well-correlated to the broader economy, as we all know from the Great Financial Crisis.
  • Markit's preliminary forward-looking PMI's for August dropped. This follows disappointing ISM PMI's for July and indicates slower growth down the road. 
  • Durable Goods Orders for July fell by more than expected. This is hard data for Q3. While one of the core figures beat expectations, it does not bode well for GDP.

Markets are in a summer lull, and Trump steals all the headlines. Markets participants were glued to their screens to watch the legal drama unfold on Tuesday. The cooperation of his former "fixer" Michael Cohen and the conviction of former campaign manager Paul Manafort got Trump in trouble. Talk of impeachment is rising.

In addition, his criticism of the Fed over raising interest rates also grabbed a lot of attention. All in all, it is easy to see how the media savvy President overshadows the data. Not all data points are weak, but some moderation after a robust Q2 is on the cards.

So far, the Federal Reserve remains optimistic and is on course to raise rates in September and probably in December. What's next? At some point or another, the hawkish stance of the Fed will have to meet reality. Both recent hard and soft data are not going in the right direction. It is always prudent to wait for more evidence, but this evidence may be unimpressive as well. In case the Fed rethinks its policy, the US Dollar will suffer.

Is it a necessary correction or moderation? Or is the downfall near? The ominous signs are piling.

More: Trade wars: Only a stock market crash can stop Trump, three reasons

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

GBP/USD surrenders some gains, back to 1.3420

GBP/USD holds on to moderate gains above 1.3400 the figure on Friday. Optimism surrounding the UK government’s leadership transition and expectations of further BoE tightening support the British Pound, while easing tensions in the Middle East and fading Fed rate-hike expectations weigh on the US Dollar.

EUR/USD turns positive, targets 1.1450

EUR/USD now picks up pace and advances toward the 1.1440 region on Friday, up modestly for the day. With no major economic data due, lingering uncertainty over the US-Iran conflict keeps investors cautious, limiting the pair's upside.

Gold remains offered, still below $4,100

Gold struggles to extend Thursday’s rebound and navigates below the $4,100 mark per troy ounce on Friday. Uncertainty surrounding the Middle East conflict limits the precious metal’s upside, which is also under pressure amid rising US Treasury yields across the curve.

Week ahead – US CPI and Warsh testimony to take centre stage, BoC eyed too

US inflation report and Warsh testimony to headline the week. Dollar to dominate amid slew of other US data and Mideast tensions. Amid fresh Iran escalation, China GDP to shed light on Q2 impact. Bank of Canada not expected to follow RBNZ with rate hike.

Five sessions, one round trip: Why the whipsaw is exactly what Warsh ordered

Markets opened July with a December hike as the base case and spent five trading sessions unlearning and relearning it. A 57K payrolls print bled the tightening bets out of the strip; a re-shut Strait of Hormuz is pushing them back in. Wednesday's minutes from the June Federal Open Market Committee meeting landed mid-round-trip, describing a world that had already stopped existing.

Five sessions, one round trip: Why the whipsaw is exactly what Warsh ordered

Markets opened July with a December hike as the base case and spent five trading sessions unlearning and relearning it. A 57K payrolls print bled the tightening bets out of the strip; a re-shut Strait of Hormuz is pushing them back in. Wednesday's minutes from the June FOMC meeting landed mid-round-trip, describing a world that had already stopped existing.