Pro Perspectives 7/26/19

July 26, 2019

We've talked about the set up for a positive surprise coming into this morning's first reading on Q2 GDP. 

We did, indeed, get a positive surprise.  The economy grew at 2.1% pace in the second quarter.  That's better than the Wall Street estimate (1.8%), and a lot better than the Atlanta Fed's estimate of 1.3%.

As we've discussed over the past two weeks, the first half of Q2 earnings season has been better than expected, because of a strong consumer.  With that, it was a safe bet that we would see the strong consumer show up in GDP this morning. Consumer spending was up 4% in the quarter. Domestic demand grew by 3.5%.  

Things are pretty good.

This leaves some people wondering if the Fed's case for rate cuts has been damaged.  

The answer is no.  While consumer confidence has been stabilized and underpinned by central bank rhetoric, business confidence has been a different story.

And this is something the Fed has been emphasizing.  Business fixed investment declined (in Q2) for the first time in three years. This is clear concern about an indefinite trade war — and monetary policy that is too tight, relative to the rest of the world, if trade protectionism were to spread and amplify. 

That's where the Fed has plenty of jusitification to make their move next week. 


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