The US unemployment rate is enviable. It’s consumer confidence America needs to worry about
- The latest figures suggest tensions over the trade war with China are starting to hit home. With more tariff trouble brewing on the European front, amid an already slowing economy, Fed officials may be forced to consider more forceful monetary easing
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.
“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.
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.
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