By Thomas Cooley and Peter Rupert
The BEA announced a 2.1% growth rate for GDP in the advance estimate for the second quarter. Personal consumption expenditures led the way, rising 4.3%. Durable goods were up 12.9% and nondurables up 6.0%. GDP growth was well below the torrid pace of last quarter and recent history but the consumer kept the economy purring along.
Business fixed investment fell slightly, mainly in structures. Residential structures have declined in 8 out of the last 10 quarters. The evidence suggests some slowing of the economy but nothing too dramatic.
To what extent should these numbers set off alarms about the state of the economy? We know that European growth is weak and that China has slowed quite a bit as well; and yet the U.S. keeps on growing and labor markets are healthy. This is not a picture of an economy in trouble and in need of liquidity. Import growth has been flat and export growth has been negative and that dragged GDP down. These are both logical consequences of the trade war.
How should the Fed react in these circumstances? Markets have already priced in a rate cut by the Fed and every major commentator has urged the Fed to cut rates preemptively. Under these circumstances a rate cut may be benign but it is hard to see what good it will do when the real problem are trade wars and jobs skills. It will also be an unfortunate sign that Chairman Powell has allowed the Fed to become more politically responsive.
