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Recession fears as US economy slows down

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07/26/2019 | 08:44am EDT

A few days after the ECB warned about the state of the European economy and hinted at QE, new figures show the U.S. economy has experienced the weakest second-quarter growth in more than two years. This is enough to stoke fears that a recession might be around the corner…

The trade war with China and the slower growth abroad are starting to take a toll on the US economy. While the strong labor market supported consumer spending, gross domestic product increased at an annualized rate of 2.1% (vs. consensus 1.8%) in the second quarter, after an increase of 3.1% between January and March. Exports and volatile stock categories account for most of the reduction in GDP.

The GDP report also shows an acceleration in inflation in the last quarter. Consumer spending growth has increased after a slowdown to 1.1% in the first quarter, which was blamed on the partial closure of the government for 35 days. However, the increase in consumer spending was offset by a sharp decline in exports (-5.2%), which is hardly surprising given the flurry of trade barriers that characterizes the current international trading environment.

Inventories were also a large drag on headline growth. This leads Wells Fargo to find some mitigating circumstances to this economic slowdown in the US.  “The rate at which businesses add-to or draw-down inventories factors into GDP. It’s a question of current quarter change compared to prior quarter change, making it notoriously difficult to forecast private inventories, especially since inventories are subject to large revisions.” In a graph, Wells Fargo argues that the largest quarterly inventory changes of the past three years occurred in each of the past three quarters:
Source : Wells Fargo

The financial group believes there’s a case to be made that the recent build is at least in part intended, as the escalating trade war over the past year may have led businesses to stockpile in anticipation of supply chain disruptions or higher input prices. “The slowdown in manufacturing and retail sales in the first quarter likely led to some unintended inventory building.”

On top of that, it says that sanctions on Iran are likely to have encouraged domestic production and contributed to a larger-than-expected inventory build, while the Boeing’s 737 MAX crisis also pressured inventories.

Nevertheless, this data will likely encourage the Federal Reserve to cut interest rates next Wednesday, while the head of the ECB, Mario Draghi, just indicated that the same would happen in the Fall. But these rate cuts might come too late to save an economy that is dangerously close to slipping into recession, according to Morgan Stanley economists, quoted by CNBC.

“For now, the path to the bear case of a U.S. recession is still narrow, but not unrealistic,” said Ellen Zentner, who heads a team of Morgan Stanley economists. A study from the bank sees a 20% chance of a recession in the year ahead, and “that could move up quickly depending on circumstances”.

Romain Fournier
© 2019
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