US Economic Outlook – 6 Sep 2019
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In light of a softer global backdrop and further trade escalation since the July rate move, we now expect the Fed to cut rates by 25 bps in September, December and January. Although some of the US tariffs on China announced on August 1 and effective September 1 were delayed until December 15, retaliation by China and a further 5% ramp-up on all current and announced US tariff levels have marked yet another escalation in tensions between the two countries in recent weeks. A technical recession is likely in Germany, adding to global headwinds. Brexit developments and other geopolitical tensions (eg change of government in Italy, souring of relations between Japan and Korea, protests in Hong Kong) compound the uncertainty. The manufacturing sector has been hit the hardest, and forward-looking business investment indicators are worrisome, while the domestic consumer segment largely still remains resilient. Bond markets have repriced sharply, with the US 10-year yield falling by roughly 50 bps to around 1.6% since late July. We don't expect the 10-year yield to rise above current levels over the forecast horizon, coming in at 1.4% at year-end 2020. Meanwhile, our baseline US growth outlook is unchanged from last month, at 2.3% yoy in 2019, slowing to 1.6% next year.
•The US economy continues to face significant downside risks; trade war remains #1.
•Consumer spending is still resilient and consumer sentiment relatively robust.
•By contrast, manufacturing is contracting, and capex trends are weak.
•Amid high levels of geopolitical uncertainty, we now expect at least three more Fed rate cuts, and see 10-year bond yields ending the year at 1.4%.