Recent US economic indicators have been signaling softness, which could potentially lead to a US recession. Data for US home sales came out on Wednesday. While US home sales rose, other housing indicators remained weak. The US manufacturing PMI also fell to multiyear lows in June. Durable goods orders fell 1.3% in May compared to a fall of 2.8% in April.
This week, we’ll get a look at several other data points. Second-quarter GDP data is set to release on Friday. After expanding by 3.1% in the first quarter of 2019, the US economy is expected to expand by just 1.8% in the second quarter.
As reported by Fox Business, Cailin Birch, global economist at The Economist Intelligence Unit, said, “We believe that recent softness in manufacturing indices is beginning to reflect the fact that demand growth is starting to flag, leaving producers in an increasingly difficult position.” She also added that she expects the economy to grow by a little over 1% quarter-over-quarter. Sluggish economic growth might give enough fodder to the Fed to start easing, but if the slowdown continues, even the Fed might not be able to stave it off, as compared to the previous cycles it has much lower flexibility at hand.
Fed’s rate cut
The Fed is expected to cut interest rates by 25 basis points in its July meeting to stave off a slowdown. The cut, however, is priced into the markets. Yesterday, the S&P 500 (SPY) and the Invesco QQQ ETF (QQQ) hit new all-time highs. This was mainly due to the rally in the semiconductor stocks. The VanEck Vectors Semiconductor ETF (SMH) gained 2.7% to hit a record. SPY and QQQ have risen 20.6% and 26.5%, respectively, this year based on the closing prices on July 24. The markets were touching record highs due to the expectations of a Fed rate cut in July.
After the markets’ latest peak, the Fed rate cut might not provide the much-needed momentum to the markets. Many investment banks, as well as big investors, believe that a Fed rate cut won’t help the markets. You can read Goldman Sachs Doesn’t Think a Fed Rate Cut Will Boost Stocks for more on this topic.
US companies concerned about US-China trade war
Moreover, if the tariff threats remain, the Fed and global policy easing might be negated to a large extent. Many companies releasing their earnings lately have been warning of the impact of the US-China trade war on their earnings and outlook. Caterpillar (CAT) attributed a part of its disappointing earnings to lower demand from China amid the ongoing trade war. As reported by MarketWatch, CSX’s (CSX) CEO said that this economic backdrop is the “most puzzling” he has experienced in this career. Micron (MU) also stated that its near-term outlook remains uncertain due to the economic and trade challenges facing the semiconductor industry.
Jeffrey Gundlach believes weakness is evident in US economic indicators, opposing Donald Trump’s claims about the US economy. In June, he put the odds of the US sliding into recession at 40%–45% in the next six months and 65% within a year.
Even the New York Fed, which gauges a recession based on yield curve inversions, estimates a 33% chance of a downturn coming in the next 12 months. This is the highest level since the Great Recession that ended in mid-2009.
US recession warnings
There are many warnings of an upcoming recession on Wall Street. Goldman Sachs (GS) is warning about an impending market crash. Morgan Stanley downgraded global equities from “equal-weight” to “underweight” due to the expectation of poor market returns. As reported by CNBC, Gluskin Sheff’s David Rosenberg said that earnings are “rolling over” and economic data indicates that the economy is very close to recession. You can read more about this in David Rosenberg Is the Latest to Warn of Recession.