Date: September 3, 2018
If Fed Policy Is Still Easy, Consumers Aren’t Getting the Memo
Federal Reserve officials say interest rates are still low enough that they continue to stimulate the U.S. economy. New data from a University of Michigan survey suggests that may no longer be the case. The share of U.S. consumers who cited low interest rates as a reason it’s a good time to buy houses, vehicles or large household durables — like furniture, refrigerators or televisions — fell to 14 percent on average this month, down from 32 percent two years earlier. At that time, in August 2016, Fed officials had authorized only one quarter-point hike of their benchmark rate following seven years near zero. Now, after six more increases, the federal funds target is just under 2 percent — higher but still well below historical averages. But the proportion of consumers in the Michigan survey reporting favorable buying conditions due to low interest rates is also well below historical averages — it’s only been lower 13 percent of the time in monthly data from 1980 — which suggests the impact of Fed tightening may be kicking in at lower borrowing costs than in the past. The poll numbers may help inform the current debate inside the Fed over whether monetary policy is still “accommodative,” as officials have been saying in the statement they publish after their twice-quarterly policy meetings. That word may soon be removed from the statement, minutes of the central bank’s July 31-Aug. 1 meeting suggested. Most participants on the Fed’s rate-setting committee believe the so-called neutral rate, which in theory is the interest rate consistent with a stable unemployment rate and is estimated using statistical models, is in the range of 2.5 percent to 3 percent, which means a few more quarter-point hikes will get them there soon.
U.K. Manufacturing Growth Slows to 2-Year Low as Exports Falter
U.K. manufacturing growth unexpectedly slowed to the weakest in two years last month as export orders contracted amid a weakening of the global economy. IHS Markit’s Purchasing Managers’ Index fell to 52.8 in August, the firm said Monday, down from 53.8 a month earlier, and below the 53.9 forecast by economists. A gauge of new orders for exports fell below the 50 level that indicates expansion for the first time since April 2016. The pound fell after the report and traded down 0.7 percent at $1.2873 as of 11:16 a.m. in London. Markit’s report also showed manufacturing production rose at the slowest pace in 17 months, while both input and output prices increased, with companies reporting higher costs of metals, electronic components and energy which were passed onto clients. Optimism among firms slumped to a 22-month low, with some citing ongoing uncertainty about Brexit and the exchange rate. The U.K.’s decision to leave the EU has already cost Britain more than 2 percent of economic output, according to a separate report published Monday by UBS Group AG. Investment is around 4 percent weaker because of the vote, the analysis showed. The manufacturing slowdown means the sector is unlikely to contribute to add to economic growth in the third quarter, Markit said. “The main constraint was the trend in new export business,” said Rob Dobson, director at IHS Markit. “Foreign demand declined for the first time since April 2016, despite the weakness of sterling, amid reports of slower global economic growth and the increasingly uncertain trading environment.” A study by Bloomberg Economics last month found that British exporters failed to make the most of the “sweet spot” created by the pound’s post-referendum drop and the time to do so may have passed. Businesses exporting from the U.K. mostly pocketed the exchange-rate windfall after the 2016 Brexit vote, rather than taking the opportunity to bolster output, the report said.
China’s Consumers Are On Point to Defend Economy From Trump
For the growth driver that will keep the world’s second largest economy on track this year, look beyond Beijing or Shanghai. Life for many in China’s most sophisticated consumer markets is getting harder, with soaring rents gnawing at disposable incomes. As Donald Trump’s trade war with China begins to threaten the economy in earnest, with tariffs on another $200 billion of goods potentially arriving this week, the resilience of the economy will depend to a large extent on the confidence, or otherwise, of shoppers outside those zones. Take Fu Ran, a 29-year-old architect in Beijing. His rent already sucked up about half his monthly income when he was told last month that it would increase another 30 percent, to 4000 yuan a month. Though he trained at the prestigious Tsinghua University nearby, Fu now mocks himself as “highly-educated, but broke.” With little funds left each month Fu says he’ll have to cut expenses on dining out, socializing and travel. His case resonates with the so-called “consumption downgrade” that’s become part of social media chatter. But as consumption including some government spending now contributes more than two thirds of annual output growth, such a development matters for policy makers. Elsewhere, things are different though, and the massive shift of China’s population upward in the wealth stakes is still continuing. While retail sales growth slowed sharply in 2018 to below 9 percent year on year, that may not capture the full picture and, indeed spending as recorded by the government’s quarterly household survey has accelerated. “Many people might feel the pressure to cut expenses, for example like young graduates hit by the rising rents, or the savers who lost money due to defaults of peer-to-peer lending platforms,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp Ltd in Singapore. “But if you look at spending on overseas tourism, which is a good indicator of how wealthy people feel about themselves and how optimistic they are, the number is quite sound.”