COLUMN-U.S. economy hits soft patch, putting Fed on alert: Kemp
(Repeats April 18 column with no changes. John Kemp is a
Reuters market analyst. The views expressed are his own)
* Chartbook: https://tmsnrt.rs/2DkAtvP
By John Kemp
LONDON, April 18 (Reuters) - The U.S. economy hit a soft
patch during the first three months of the year with
manufacturing output up only slightly compared with the same
period a year earlier and freight movements mostly down.
U.S. manufacturing production was up by just 1.8 percent in
the three months from January to March compared with the first
quarter of 2018, down from 3.5 percent growth in the
Road freight volumes were up 4.6 percent year-on-year in
December-February, down from 8.3 percent growth in April-June
last year, according to figures compiled by the American
Containerised rail freight was up by just 1.2 percent in
December-February, down from more than 6 percent growth in
July-September, according to the Association of American
More recent data suggests rail freight shrank by almost 2
percent in the first quarter of 2019 compared with the same
period in 2018 with declines in both bulk and containerised
The number of containers handled by the Port of Los Angeles,
the busiest cargo facility on the west coast, which handles
trans-Pacific trade, was down by 1 percent in the first three
months of the year.
Containers handled at the Port of Long Beach, the other main
Pacific gateway, and subject to less month-to-month volatility,
were down by more than 7 percent in January-March compared with
Manufacturing employment was still 1.9 percent higher
year-on-year in January-March, but job creation is no longer
accelerating and shows signs of turning over (https://tmsnrt.rs/2DkAtvP).
On every real-time metric, manufacturing activity lost
momentum in the final quarter of 2018 and extending throughout
the first three months of 2019, after expanding very rapidly
earlier in 2018.
FED IN FOCUS
The current slowdown resembles the summer of 1998, when a
similar loss of momentum prompted the Federal Reserve to cut
interest rates by 75 basis points between September and
Policymakers have given no indication they will respond the
same way this time, but if there is no sign of re-acceleration
by the end of June, the central bank is likely to cut rates at
least once in the second half of the year.
"Incoming data have revealed signs that U.S. economic growth
is slowing somewhat from 2018's robust pace. Prospects for
foreign economic growth have been marked down, and important
international risks ... remain," Fed Vice Chair Richard Clarida
warned this month ("U.S. economic outlook and monetary policy",
Clarida's language is not much different from the Fed's
observations a few months before cutting interest rates in 1998:
"Information reviewed at this meeting suggested that the
expansion in economic activity has slowed considerably after a
very rapid advance in the first quarter", the rate-setting
Federal Open Market Committee concluded at the start of July
Clarida has drawn an explicit parallel between the Fed's
precautionary interest rate reductions in 1998, which staved off
a feared recession, and the Fed's options in 2019 ("Global
shocks and the U.S. economy", March 28).
Soft patches often draw heightened scrutiny of incoming data
from the members of the Federal Open Market Committee and
usually prompt a willingness to contemplate precautionary
monetary easing, cutting interest rates early by a small amount
to avert the need for deeper reductions later.
Yield spreads for U.S. Treasury securities maturing in the
second half of the year show traders pricing in a relatively
high probability interest rates will fall before the end of
U.S. core consumer price inflation excluding volatile food
and energy items seems to have peaked and turned lower since the
start of the year, likely reflecting the loss of economic
Slower inflation will give the central bank more scope for a
precautionary cut in interest rates if necessary to avert a
deeper and longer slump.
The first critical question is whether the U.S. economy will
pull out of its doldrums on its own or require assistance from
monetary and fiscal policymakers.
Optimists point to continued growth in employment and real
incomes, as well as the prospect of a trade deal between the
United States and China, as reasons why the economy will
accelerate again later in the year.
Pessimists point to the likelihood of continued trade
tensions even if an agreement is concluded, which is part of a
more unsettled landscape for businesses and consumers worldwide,
depressing consumption and investment.
Pessimists can also point to the existence of positive
feedback mechanisms in the economy, which tend to fuel booms,
but can also accelerate the descent into a recession once the
economy starts to falter.
In other words, accelerating growth tends to beget a further
acceleration, but a slowdown tends to beget a deeper one, unless
policymakers intervene to modify the course of the economy.
If there is a continued slowdown, and the Fed responds with
a precautionary relaxation of monetary policy, the second
critical question is whether it will be enough to avert a long
and deep slowdown.
The buoyancy of bond, equity and oil markets suggests
traders see a relatively high probability of the Fed cutting
interest rates but believe it will be enough to keep the economy
expanding through the rest of 2019 and 2020.
- Next U.S. recession is likely to be shorter and milder
(Reuters, March 26)
- Fed wrestles with signs of a slowing economy (Reuters,
- Oil and equities prepare to party like it's 1999 (Reuters,
- Fed's next move more likely to be cut in interest rates
(Reuters, March 7)
(editing by David Evans)
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