- After an excellent second quarter, data for the third quarter begin to disappoint.
- The circus around Trump diverts attention from the data.
- The Fed may begin noticing it soon and this may hurt the US Dollar.
The US economy grew at an annual pace of 4.1% in Q2 2018 according to the initial read. President Donald Trump took a victory lap on the fastest growth rate in four years. Some had noted that the accelerated pace in Q2 might be related to a front-running of the tariffs on China.
Once the rush is gone, we may see some moderation. And with these duties serving as a tax on consumers. There is nothing wrong in a sub 4% quarter. But this may be somewhat worse than that.
Tariff-related or not, the data released in mid-August are not so promising:
- Existing Home Sales dropped for the fourth consecutive month. The last time this was seen was 2013.
- New Home Sales slipped and with a downward revision. Housing is well-correlated to the broader economy, as we all know from the Great Financial Crisis.
- Markit's preliminary forward-looking PMI's for August dropped. This follows disappointing ISM PMI's for July and indicates slower growth down the road.
- Durable Goods Orders for July fell by more than expected. This is hard data for Q3. While one of the core figures beat expectations, it does not bode well for GDP.
Markets are in a summer lull, and Trump steals all the headlines. Markets participants were glued to their screens to watch the legal drama unfold on Tuesday. The cooperation of his former "fixer" Michael Cohen and the conviction of former campaign manager Paul Manafort got Trump in trouble. Talk of impeachment is rising.
In addition, his criticism of the Fed over raising interest rates also grabbed a lot of attention. All in all, it is easy to see how the media savvy President overshadows the data. Not all data points are weak, but some moderation after a robust Q2 is on the cards.
So far, the Federal Reserve remains optimistic and is on course to raise rates in September and probably in December. What's next? At some point or another, the hawkish stance of the Fed will have to meet reality. Both recent hard and soft data are not going in the right direction. It is always prudent to wait for more evidence, but this evidence may be unimpressive as well. In case the Fed rethinks its policy, the US Dollar will suffer.
Is it a necessary correction or moderation? Or is the downfall near? The ominous signs are piling.
More: Trade wars: Only a stock market crash can stop Trump, three reasons
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