The week is finally here where the Fed is expected to cut rates even though we have a strong economy. The question becomes will they cut .5% or .25%? If you look at Jerome Powell’s commentary from the last few weeks, he has highlighted the weaknesses and downplayed the strong data.
On the heels of the Fed possibly cutting rates for the first time since 2008, we really want to focus on the backbone of our economy, the consumer. As we have previously stated, consumer spending makes up 70% of our economy. We got a big boost in both consumer spending and personal income in the second quarter. This week makes for a big week of consumer reports coming out. On Tuesday personal income, consumer spending and consumer confidence index will be reported. Also, on Friday, we will get the consumer sentiment index report. It will be really important to see if this strong consumer trend will continue moving forward.
Consumer spending really helped our economy in the second quarter. Business expense and spending on CapEx, capital expenditures, is really off from the first quarter. Everything we have been dealing with on negotiations with China has been almost going on for a year now. If you are a company in the United States and not hiring people you can spend it in one of four ways. This includes software, research & development, buying or expanding buildings, and buying equipment. At the end of 2018, the trade war hadn’t grounded on us as much as now. A lot of corporations were spending more in all four categories. Now, fast forward six to seven months, companies might be spending in only one of those categories. Companies were spending around 4.4% in the first quarter compared to around 0.6% in the second quarter. The consumer has really held our economy up.
GDP & China
We are gathering a lot of this data from last week’s reported GDP number. We saw a better than expected 2.1% quarter-over-quarter annual growth rate. The consumer made up 2.9% of that number. CapEx was actually a drag of -0.1% on GDP growth. If it wasn’t for the consumer our economy would have moved backwards. This week is a big one in terms of China negotiations. We aren’t expecting a deal, but, Chinese and United States diplomats are meeting this week to discuss re-starting those negotiations. This will be big news, along with the Fed, to see how this economy is going to grow moving forward.
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