Markets Rattling Investors, Fed Still Calm

OCTOBER 29, 2018

Equity market turmoil continued throughout last week, raising fresh questions about the Fed’s policy path. I don’t believe that Powell & Co. will panic just yet. I suspect they will take a broad view of incoming data and financial indicators and conclude they have little reason to alter their policy path. This will obviously be somewhat disconcerting for already rattled investors.

Start with the GDP report. It was generally upbeat with second quarter growth coming in at 3.5%, ahead of expectations for a 3.3% gain. Consumer spending grew at a solid 4% pace. No wonder we are seeing strong confidence numbers. Nothing makes Americans happier than spending, and when they can, they do – in three of the last four quarters, spending growth has registered at 3.8% or higher. With such a sustained, solid pace, I think the Fed would interpret any consumption slowing in the fourth quarter as temporary.

Inventory build contributed 2.1 percentage points to growth, while net exports subtracted 1.78 percentage points. I think we have two things going on here. First, there may have been some inventory building to get ahead of expected tariffs. That would be offsetting – counting as a plus via inventories and a negative via imports. These factors would likely fade out in the fourth quarter. But there was also a -0.45 percentage point contribution from exports, arguably attributable to some mixture slower global growth, retaliatory tariffs, and a stronger dollar. We may be waiting on the fourth quarter to see how all of these factors play out.

A more worrisome aspect in the report was the soft read on nonresidential investment, which contributed a meager 0.12 percentage points, the worst result since the final quarter of 2016. Couple that with the fading core manufacturing orders and you can tell a story that the Trump tax cut boom is fading which – especially when combined with uncertainty created by President Trump’s trade policy – suggests that maybe the capital equipment resurgence is coming to an end.

Timothy A. Duy Senior Director, Oregon Economic Forum Professor of Practice Department of Economics University of Oregon Eugene, OR 97403-1285 duy@uoregon.edu