This Week In The Economy: ‘Self-Inflicted’ Damage To Global Growth, Manufacturing’s Prolonged Struggle, Housing Market’s Struggles

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

The International Monetary Fund this week once again lowered its outlook for global economic growth this year and in 2020, citing the impact of ongoing trade protectionism and weakness in emerging market economies.

In an update to its World Economic Outlook, the IMF revised downward its projection for global growth to 3.2% in 2019 and 3.5% in 2020 — both of which are 0.1 percentage points lower compared to its projections in April. The lowered expectations for this year reflect “negative surprises” in emerging market and developing economies’ growth that cancelled out positive data in some advanced economies, the IMF said.

Advanced economies are expected to experience collective real GDP growth of 1.9% this year, before slowing to a 1.7% growth rate in 2020 “as the effects of fiscal stimulus taper off in the United States and weak productivity growth and aging demographics dampen long-run prospects for advanced economies.”

Meanwhile economic growth for emerging market and developing economies is being revised down by 0.3 percentage points in 2019 to 4.1% and by 0.1 percentage points for 2020 to 4.7%.

“Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted. Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased,” it warned.

The manufacturers around the world continue to bear the brunt of the slowdown in global economic activity, especially what the IMF describes as “the significant weakness” in global trade. The WEO noted that the expansion of global trade slowed to 0.5% year-on-year in the first quarter of 2019, its slowest pace since 2012.

Global trade usually moves in lock-step with business investment, and the IMF noted that “manufacturing purchasing manager indices continue to decline alongside worsening business sentiment as businesses hold off on investment in the face of high uncertainty.”

Backing up this assessment, the IHS Markit Flash Eurozone PMI data released this week showed a worsening contraction in manufacturing activity, with new orders almost stagnated while business sentiment fell to its lowest since late-2014 — in turn leading companies to take an increasingly cautious approach to hiring. The fierce competition for what few customers there are (given weak demand) is also putting downward pressure on prices.

As for the United States, business conditions for manufacturers remain stagnant as well as the uncertainty surrounding the global economy grows:

“The overall picture of modest growth conceals a two-speed economy, with steady service sector growth masking a deepening downturn in the manufacturing sector … . Future prospects have also darkened to the gloomiest since comparable data were first available in 2012, suggesting that companies may look to tighten their belts further in coming months, dampening spending, investment and jobs growth. Geopolitical worries, trade wars and increasingly widespread expectations of slower economic growth at home and internationally have all pulled business optimism lower.”— IHS Markit

White House Reaches Two-Year Budget Deal With Lawmakers— The Trump administration and Congressional leaders reached a deal this week to raise the government’s spending levels and extend the debt limit for the next two years, meaning there won’t be a potentially-damaging budget fight during the height of campaign season next year.

The agreement, which still requires a vote in both the House and Senate to be approved, raises defense spending (a Republican priority) to $738 billion next fiscal year — a $22 billion increase. It boosts nondefense spending (a core issue for Democrats) to $632 billion — a $27 billion increase.

European Central Bank Leaves Interest Rates Unchanged — The ECB’s Governing Council met this week but decided to leave key interest rates unchanged, even while reaffirming the euro area economy still requires very loose credit conditions. Senior officials continue to expect rates will remain at current levels, or lower, at least through the first half of 2020, and in any case for as long as necessary.

In remarks during a press conference after the meeting, outgoing ECB President Mario Draghi noted that incoming economic data and survey information continue to point to “somewhat slower growth” in Q2 and Q3 of this year. “This mainly reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector,” he said.

U.S. Durable Goods Orders Bounce Back In June — The death knell for business fixed-investment might have been premature, based on data released this week, as new orders for durable goods (aircraft, computers, factory equipment etc.) increased 2% in June. This follows two consecutive monthly decreases, and almost makes up for the 2.3% drop May. Excluding transportation, new orders increased 1.2 %. Excluding defense, new orders increased 3.1%. Transportation equipment (mainly Boeing), were also up following two consecutive monthly decreases, led the increase, jumping by 3.8%.

Source: FTN Financial

June Rebound In New Home Sales Masks Overall Sluggish Pace of U.S. Housing Market— Sales of new home sales in the U.S. rebounded by 7% in June to a 646,000-unit annual rate. However, almost all of the increase came from the West, where sales jumped 50.4%. Sales inched up 0.3% in the South but plunged 26.3% in the flood-impacted Midwest and fell 4.2% in the Northeast. The smaller than expected June rebound and downward revision to the prior data raises a number of questions about just how much of a lift lower mortgage rates will provide the housing sector.

Meanwhile, sales of existing homes weakened in June, down 1.7% from May to a seasonally adjusted annual rate of 5.27 million. Sales as a whole are down 2.2% from a year ago (5.39 million in June 2018).

The National Association of Realtors noted that despite very low mortgage rates, high levels of employment, and increased wealth, the current rate of home sales is similar to 2015 levels — blaming a housing shortage and the need for more inventory. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” the group said.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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