The US unemployment rate is enviable. It’s consumer confidence America needs to worry about

With the US unemployment rate falling to 3.5 per cent last month, its lowest level since December 1969, it might seem odd to suggest that the US economy could be heading into choppier waters. But the signs are there. The US-China trade war may finally be having a negative effect on American consumer confidence and a new trade dispute between the United States and the European Union is brewing. Additionally, last month there was some unexpected tightness in US money market conditions. The Federal Reserve might be forced to ease US monetary policy more than it had envisaged. The domestic consumer is critical to the health of the US economy. More than two-thirds of US economic activity is accounted for by American consumer spending. But the US consumer seems somewhat subdued. US consumer spending only increased marginally in August, while, according to a report from industry group The Conference Board, US consumer confidence registered its biggest fall in nine months in September. The board’s index of consumer attitudes slumped to 125.1 last month, from 134.2 in August. “The escalation in trade and tariff tensions in late August appears to have rattled [US] consumers,” Lynn Franco, senior director of economic indicators at The Conference Board, said in the accompanying statement. With that in mind, this week’s China-US trade talks, with China’s Vice-Premier Liu He visiting Washington, assume even greater importance. Meanwhile, the United States is set to impose a new set of tariffs on specific goods imported from the European Union, with effect from October 18. Trump’s impeachment risk may be a silver lining for the US economy Washington has received permission from the World Trade Organisation to go ahead, after the WTO upheld the US’ complaint that the EU was guilty of providing unlawful subsidies to European aeroplane manufacturer, Airbus. A 10 per cent tariff will be imposed on imported Airbus aircraft. Other products will also be levied. For example, French wine, Italian cheese and single-malt Scotch whisky will all be subject to an additional 25 per cent tariff. If US consumer confidence is already being negatively affected by the trade war with China, EU-US trade strife will hardly help matters. Some Fed officials may be picking up on the changing US economic mood music. In comments at an economic round-table discussion at the University of California last week, New York Federal Reserve chief John Williams argued that, although the US economy looks strong if viewed through the rear-view mirror, “the real issue is where are things going from here, and that’s where it’s a much more mixed picture”. “We have seen signs of the [US] economy slowing somewhat,” Williams said. “We want to get monetary policy positioned to keep the economy growing at a sustainable pace.” That sounds like a central banker who might be open to even looser monetary policy. More policy easing won’t get global economy out of the mud US survey data released last Thursday by the Institute for Supply Management wasn’t great. Its index of non-manufacturing activity fell to 52.6 last month, down from August’s 56.4, its lowest reading since August 2016. The accompanying employment index for September fell to 50.4 from August’s 53.1, its lowest level since February 2014. With the service sector so important to the US economy, and amid signs of declining consumer confidence, the Fed has a lot to ponder, even if the unemployment rate is at a level not seen since 1969. The Federal Reserve also has another issue to consider when it meets on October 29-30. US money market conditions unexpectedly tightened in mid-September, prompting the Fed to add liquidity to the financial system. As part of that liquidity provision, the US central bank announced it would conduct overnight repurchase (repo) operations, worth at least US$75 billion, every day until October 10. Yet last Friday, the Fed felt the need to announce those daily repo operations would now continue until November 4. The global economy is in the hands of the American consumer Clearly the Fed feels the US money market still needs assistance, but the longer that need for temporary liquidity provision continues, the more likely it is that questions will be asked about whether prior bouts of quantitative tightening by the Fed, in its attempts to shrink its balance sheet, have contributed to the situation. Pressure may build not merely for the Fed to cut interest rates further but also to restart asset purchases over a longer period, materially re-expanding its balance sheet. The US economy may have its lowest unemployment rate in half a century but it is facing significant challenges. The Fed may decide it has to adopt a more forceful approach to US monetary policy easing. Neal Kimberley is a commentator on macroeconomics and financial markets