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US GDP, Trade Data Show Consumers Strong Despite Trade War

Matt Eidinger September 26, 2019

During a week filled with talk about President Trump’s impeachment inquiry and renewed hopes a trade deal with China could come soon, several key economic indicators demonstrated strength in the US economy.

The US Bureau of Economic Analysis (BEA) reported the final reading on second quarter GDP registered a 2% increase – in line with market expectations and exactly the same as last month’s estimate. Today’s second quarter GDP report draws attention to a broad slowdown in exports, inventories and non-residential fixed investment.

Despite these trends, there were favorable revisions to government spending – primarily by state and local governments – and the pace of consumer spending held steady at 2%. Likewise, the PCE price index, excluding food and energy, was revised upwards from 1.7% to 1.9%.

Echoing weaker exports was the advance reading on international trade from the Census Bureau, which indicated the US trade deficit expanded less than expected to $72.8 billion during August. Underneath the headlines, exports of both consumer and capital goods were down during August and year over year – indicating the decline in exports could continue in the third quarter as well.

Trade and GDP data highlight the effects of the ongoing trade conflict with China. Still, these same data points also indicate a strong consumer at the core of the US economy, largely unfazed by the risks the trade war poses. As the US Federal Reserve sits on the fence about a third “mid-cycle cut” to interest rates next month, it will have to balance these competing interests. 

Finally, the Department of Labor reported initial jobless claims rose slightly to 213,000 during the week ending September 21. In contrast, the less volatile four-week moving average improved slightly to 212,000.

Thursday also marked additional operations by the New York Fed in the overnight repurchase market. After spiking well above the upper bound of the fed funds rate, which stands at 2%, on two occasions last week, the NY Fed committed to injecting additional liquidity into money markets to prevent another occurrence. The last time repo rates spiked in a similar manner was in the run-up to the 2007-2009 financial crisis.

The US dollar was modestly stronger overnight as a result of a report that the World Trade Organization is close to ruling against Airbus in a decade long dispute brought forth by the US alleging the EU provides illegal state aid to the aerospace firm. The greenback slipped a bit against the loonie, but its gains against the euro and the pound-sterling remained mostly intact. Similarly, the trade-weighted dollar index has risen steadily throughout the week to a two and a half year high of 98.89.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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