Quick Bite – US Economy Holding Up, even with Fed Cuts Ahead
We started off the year expecting a slowdown in the US economy as tariffs bit, but it has remained a remarkably strong and resilient period. And now, any weak economic news has switched the narrative to “bad news is good news” because economic weakness provides an excuse for the Federal Reserve to cut rates. Employment figures came in weak for the second time in a row: America added less than 30,000 jobs on average in June, July and August, the Bureau of Labour Statistics (BLS) announced, ensuring that a Fed rate cut will happen later this week.
Source: Pantheon Economics
Yields on Treasury bonds have slumped by 0.2% over the past fortnight, as worries about growth and the job market have spread. At the Fed’s next meeting on 17 September, a rate cut looks certain. Markets expect further cuts in October and December. The easing that Donald Trump has long sought is on the way, even if for more depressing reasons than the president expected.
Growth in the US has certainly slowed. But dig deeper in the data and you find reasons for hope. Although the slump has been real, it has also been modest and no longer seems to be worsening. The 1.4% annualised GDP growth that the US posted in the first half of the year would count as good news for many in Europe. And the 2% growth America has managed over the past year looks better yet in comparison.
Source: Economist
American consumers are still spending. The latest figures covering July suggest that real household consumption has ticked up after a sluggish start to the year. Surveys of services activity suggest a similar trend; retail sales have remained solid throughout the year. The Atlanta Fed’s tracker indicates that the core components of GDP (private spending and investment) are on track to rise by an annualised rate of over 2% in the third quarter. Stock markets are hitting all-time highs, and corporate earnings are strong, contributing to and reflecting the surprisingly resilient economic picture.
Yes, it’s true that jobs numbers are weak. But remember that slower jobs growth is mostly a problem if America’s population is rising quickly, and far less worrying if population growth is stalling or shrinking. Unemployment at 4.3% is still very low by historical standards. One unknown is how effective President Trump’s clampdown on migration, both legal and illegal, has been. Early estimates suggest a big impact. The Congressional Budget Office (CBO) recently revised down its estimate for net migration in 2025 from 2m to 400,000.
Slower population growth lowers the “breakeven” rate of job creation (that needed to keep the employment rate stable), meaning even weak employment figures could be consistent with a healthy economy. Last year’s population estimates from the Census Bureau suggest 90,000 new jobs would be needed to hit the rate, according to calculations by the Peterson Institute for International Economics. Include the CBO’s newer migration estimates and the figure falls to 50,000.
Source: Economist
The economy’s resilience owes much to its strong fundamentals. More immediate boosts are helping, too. The summer’s slowdown reflected enormous uncertainty after the chaos of “Liberation Day” and subsequent tariff wrangling. Now the broad outlines of the import-tax regime look more certain. Tariff revenues, after rising sharply, appear to have stabilised in the past few months. Uncertainty measures have fallen accordingly, even if not all the way back to the levels of last year.
Source: Pantheon Economics
Indeed, despite the Fed’s looming cuts, there are few obvious signs that monetary policy is too tight: bank surveys suggest they remain happy to lend, spreads on corporate bonds are narrow and inflation is still well above the Fed’s 2% target. Whether or not a series of rate cuts is advisable, it will add more fuel to the fire, and keep the share market rolling.
