Political Turmoil

Political unease continues following yesterday’s testimony of Joseph Maguire, the acting national intelligence director, who was responsible for the delay in turning over the complaint about President Trump's July phone call with Ukrainian leader Volodymyr Zelensky before Congress. Speaker of the House Nancy Pelosi, furthermore, has accused Attorney General William Barr of going “rogue" and the Justice Department of heading toward "a cover-up of the cover-up." According to Pelosi, President Trump appeared to have been disloyal to his oath of office in "jeopardizing our elections.”

House Democrats are hoping the impeachment inquiry will be wrapped up before Thanksgiving. Many worry, however, regardless of the timeline, if the inquisition doesn’t go all the way to a guilty verdict, the lack of results will hurt Democrats in the 2020 election.

Speaking of political turmoil, according to Bank of England policymaker Michael Saunders, the BOE may need further rate cuts – and soon. Speaking to local businesses in Barnsley, northern England, Saunders said even if a no-deal Brexit is avoided, high levels of uncertainty would persist and act as a kind of "slow puncture" for the U.K. economy. “In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing."

Recall, interest rates at the BOE have been on hold at 0.75% since August 2018, when they were raised from 0.5%.

The pound slipped after the BOE official said rates may have to be cut. The pound is down 0.05%, currently trading at $1.23 against the U.S. dollar as of 9:09am ET.

In international news, China's top diplomat, Wang Yi, said Beijing was willing to buy more U.S. goods, adding trade negotiations would yield results if both sides "take more enthusiastic measures" to show goodwill and reduce "pessimistic language." China is said to be seeking to increase purchases of U.S. pork products. The move, however, should be seen as an act of necessity, not a sign of goodwill, according to Bloomberg, as Beijing faces domestic shortages from swine flu.

Yesterday, GDP was unrevised at 2.0% in the final Q2 report, as expected, according to Bloomberg, and following a 3.1% increase at the start of the year. Year-over-year, GDP increased 2.3%, down from 2.7% the quarter prior, and the slowest pace in two years. 

In the details, personal consumption was revised down a tenth of a percentage point to 4.6% in the third-round Q2 report, still the largest increase since Q4 2014, due to a downward revision in goods consumption. Goods consumption was revised lower from 8.8% to 8.6% in Q2, with nondurable goods revised down from 6.8% to 6.5%, while durable goods were unrevised at 13.0%.

Services consumption was also unrevised at 2.8% in final Q2 report, a three-quarter high.

Gross private investment, on the other hand, was revised lower to a 6.3% drop, the largest decline since Q1 2011, with inventories revised slightly higher from $69.0B to $69.4B, still a four-quarter low. 

Nonresidential investment, including office buildings and factories, was revised down from a 0.6% decline to a 1.0% drop following a 3.2% gain in Q1. Structures investment was revised down from a 9.4% decline to an 11.1% drop and intellectual property investment was revised down a tenth of a percentage point to 3.6%, while equipment investment was revised up from 0.7% to 0.8% April to June. Residential investment, meanwhile, was also revised lower from a 2.9% decline to a 3.0% drop in the final second-quarter report, marking the sixth consecutive quarter of decline.

On the trade side, exports were revised up from a 5.8% drop to a 5.7% decline, a three-quarter low, and imports were revised lower a tenth of a percentage point to 0.0%, resulting in a net contribution of -0.68% to headline growth.

Finally, government consumption was revised up three-tenths of a percentage point to 4.8% in the final Q2 report. Federal spending was revised higher from 8.1% to 8.3%, and state and local spending was revised up from 2.3% to 2.7% in the third-round Q2 report, a two-quarter low.

Bottom Line: Second-quarter growth remained solid at 2%, albeit a noticeable slowdown from a more robust 3.1% pace at the start of the year. Of course, the concern remains the composition of activity with the consumer the sole organic support to activity April to June. Going forward, without improvement in other key sectors of the economy it will be increasingly difficult for the consumer to shoulder the perpetuation of the expansion alone.

Also yesterday, initial jobless claims rose 3k from 210k to 213k in the week ending September 21. The four-week average, however, declined from 213k to 212k.

Wholesale inventories rose 0.4% in August, more than the 0.1% rise expected, according to Bloomberg, and a three-month high.

Pending home sales rose 1.6% in August, more than the 1.0% rise expected, according to Bloomberg, and a two-month high. Year-over-year, pending home sales rose 1.1%, following a 1.7% gain the month prior.

Finally yesterday, the Kansas City Fed Index rose from -6 to a reading of -2 in September, more than the expected rise to -4, according to Bloomberg, and a two-month high.

This morning, personal income rose 0.4% in August, as expected, according to Bloomberg, and a two-month high. Personal spending, however, increased 0.1% in the second month of the third quarter, less than the 0.3% rise expected, and a six-month low. Year-over-year, personal income and personal spending rose 4.6% and 3.8%, respectively.

The PCE was flat in August, a seven-month low and following a 0.2% rise the month prior. According to Bloomberg, the PCE was expected to rise 0.1% in the second month of the third quarter. Year-over-year, headline inflation increased 1.4% for the fourth consecutive month in August, as expected. Excluding food and energy, the core PCE rose 0.1% in August and increased 1.8% year-over-year, a seven-month high.

Adjusting for inflation, real personal spending and real disposable income rose 0.1% and 0.4% in August, respectively.

Also this morning, durable goods orders unexpectedly rose 0.2% in August, following a 2.0% gain the month prior. According to Bloomberg, durable goods orders were expected to fall 1.1% in August. Year-over-year, however, headline orders dropped 4.2% in the second month of Q3, a two-month low.

Transportation orders fell 0.4%, following a 7.2% increase the month prior, due to a 17.1% decline in civilian aircraft orders, a three-month low, and a 0.8% fall in vehicles and parts orders. Excluding transportation, durable goods orders rose 0.5% but declined 1.3% over the past 12 months.

Capital goods orders rose 0.2% in August, a three-month low. Nondefense capital goods orders declined 2.1% in the second month of the third quarter. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 0.2% in August, a four-month low. Year-over-year, business investment dropped 1.7% in August, following a 0.6% gain the month prior, and down from a recent peak of 13.3% in September 2017.

In other details, primary metals orders rose 1.5%, fabricated metals orders increased 1.3%, and machinery orders gained 0.6% in the second month of Q3, a two-month high. On the weaker side, computers and electronics orders fell 0.3% and electrical equipment orders declined 1.3%, a nine-month low.

Finally this morning, the University of Michigan Consumer Sentiment Index rose from 92.0 to 93.2 in the final September reading, more than the expected rise to 92.1, according to Bloomberg, and a four-month high. In the details, consumer expectations rose from 82.4 to a reading of 83.4 and consumers’ assessment of current conditions improved from 106.9 to 108.5 in the final September report, a two-month high.

-Lindsey Piegza, Ph.D., Chief Economist